G7 Finance Ministers and Central Bank Governors have issued communique on 5 June 2021 highlighting key pacts finalized and agreed on in their meeting held at London, United Kingdom. G7 consists of Canada, France, Germany, Italy, Japan, the U.K. and the U.S. The meeting was held along with top officials of International Monetary Fund (IMF), World Bank Group, Organisation for Economic Cooperation and Development (OECD), etc.
Along with the other decisions the communique includes points on global tax reforms, which were in the pipeline and under discussion for a long time. The meeting proposes significant tax reforms to be implemented and achieved in following manner:
Commitment towards a global minimum tax of at least 15% on a country by country basis.
Market countries to be awarded with taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises. These will include “companies that have no physical presence but have substantial sales in the market country”
Removal of all digital services taxes (aka Google tax in many countries), and other relevant similar measures, for all companies.
The agreement will be discussed in detail at a meeting of G20 finance ministers in July 2021 in Venice.
If this is implemented, technology giants like Amazon, Facebook and Google as well as other large global businesses will have to pay taxes in countries based on the sale of their goods or services, regardless of whether they have a physical presence in that nation.
U.S. Treasury Secretary Janet Yellen, hailed the move as significant and unprecedented and tweeted “That global minimum tax would end the race-to-the-bottom in corporate taxation, and ensure fairness for the middle class and working people in the U.S. and around the world”
British Finance Minister Rishi Sunak said the development as a “historic” decision would make the global tax system “fit for the global digital age.”
German Finance Minister Olaf Scholz described the breakthrough as a “tax revolution and very good news for tax justice and solidarity and bad news for tax havens”.
Implications
The proposals are still a long way from getting accepted and implemented, which may take considerable time. There are many large nations who may not adopt these on the ground of sovereignty.
The model of hiring sales staff in a country and paying taxes on a cost plus agreements in those countries could become history. Taxes may have to be paid in those countries based on actual sales although it appears that the proposals are aimed at only the largest and most profitable multinational enterprises.
Tax havens will be impacted and may lose their popularity.
Determining actual taxable income in a market country will become a factor in tax litigation.