Rich Nations Close to Tech Tax Deal

Critical Overview: The French and German finance ministers have expressed optimism that a global agreement to put an end to the “race to the bottom” on corporate taxation is imminent, with the G7 countries being a whisker away from a historic agreement on a global minimum rate of tax. It is hoped that this would target tech giants such as Amazon and Microsoft, and contribute to debt repayment following the Covid crisis. The UK’s Chancellor of the Exchequer is confident that a global agreement on digital taxation will be reached. Climate change will also be on the agenda of the two-day G7 finance ministers summit starting on Friday.

Global Minimum Rate and Sticking Points: The two finance ministers regard an agreement on a minimum rate as the sticking point. Bruno le Maire views the 15% rate as a starting point, suggesting a higher rate than 15% would be better. Conversely, Olaf Scholz regards 15% as an effective starting point, representing a turning point after years of going in the opposite direction. The UK has turned around on minimum tax rates, with the current administration overseeing an agreement to restrict the extent to which a future chancellor could reduce them. Two sticking points remain: the mention of a global minimum corporation tax rate of 15%, and the wording “at least 15%” to provide negotiation space for the wider G20 meeting, including China and Russia.

Withdrawal of Digital Taxes: The US requested France, Italy and the UK, which have levied digital taxes, to withdraw them swiftly as part of the agreement. However, at least one finance minister labelled the request a “non-starter” because it could lead to the big tech giants paying less tax. The agreement is likely to involve the ability to charge the world’s largest companies, numbering approximately 100, based on their sales location, rather than the location of factories or patents and trademarks. This new approach has the potential to transform not only Big Tech but also some conventional multinationals.

Transformative Potential and Further Talks: The end result of the agreement is likely to depend on fine details. It has the potential to be transformative, particularly for Big Tech and some conventional multinationals. The US imposed tariffs on around $2bn of imports, including specific goods from the UK, in response to taxes on big US tech firms. It suspended them for 180 days to allow further talks in London and at a G20 meeting in July. The UK’s Chancellor of the Exchequer is expected to push for an agreement on taxes and call for all global businesses to commit to climate reporting.

Conclusion: It is likely that a deal on global taxation will be reached by Saturday morning, with the attending finance ministers certain that it will be of historic significance. The agreement has been described as a turning point in global co-operation and is considered to have the potential to start setting the rules for the 21st century. If the Western G7 democracies are incapable of achieving the agreement, it is likely that China will do so. Ahead of the G7 talks, the finance ministers of France, Germany, Italy and Spain co-signed a letter, urging an agreement on an international tax system that is “fit for the 21st Century”.