On June 5th 2021, finance ministers from the Group of Seven (G7) countries finally reached an accord that created a global minimum corporate tax rate of 15%. The G7 endorsed this rate on the most prominent multinational companies to stop the race to the bottom that countries use to attract these companies. French Finance Minister Bruno Le Mair described this threshold as a starting point that could be raised in the future.
One of the issues that have plagued the business world is major multinational companies avoiding paying the appropriate taxes. Major economies usually shift profits and revenues to low-tax countries regardless of where they make their sales. This is done in a bid to lower their levies to lower numbers than they would get from high-tax nations.
The race to the bottom happens when countries attempt to reduce their rates in an attempt to attract these multinational companies. This results in a tax competition where governments use reductions in fiscal burdens to discourage the exodus of resources. Multinational corporations then use these tax havens to reduce their bills.
Global minimum tax explained
A global minimum levy is a set figure that multinational companies will be required to pay regardless of which country they are operating from. Previously, the tax rates differed from country to country. Because of this, companies tried to only do businesses with countries that had low tax rates to try and reduces the taxes they had to pay.
What is the global minimum corporate tax rate? In April 2021, the Biden administration proposed changes to US corporate toll rate policies. It included a proposal to establish a global minimum levy on businesses. The plans were to set the rate at 15%.
This plan would force giant multinationals to pay taxes in all the countries where they sell their goods and services. The corporate tax US proposal was finally set in motion on June 5th. In a country that imposes the minimum rate, if a domestic company moves its business to a low tax jurisdiction, the company owes its home government the remaining amount.
For example, if a country has a minimum levy of 15%, a company could choose to do business in a country where its earnings would be taxed at 5%. The home government of the company will charge the company the additional 10% to get it to fifteen.
Although the deal is a significant leap in minimising tax fraud, its effects will not be felt for quite a while. 15% is a relatively low figure, and there are plenty of details left to be figured out. However, a minimum levy rate goes a long way to stop the system that pitted countries against each other.
What is the G7 group?
The Group of Seven is an inter-governmental political forum that is made up of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. The members of these countries are the world’s largest advanced economies and liberal democracies. Because the group is not based on a treaty and has no permanent secretariat, its presidency rotates among its members.
There have been calls for expansions to expand the G7, and the US even signalled support for the inclusion of India, South Korea, and South Africa. In 2021, leaders from these countries were invited to the summit. The group has been coordinating tax negotiations among many countries for years They also create the rules that govern global tax rates.
The G7 group got together to set a global minimum corporate tax rate of 15% for every multinational company. This will stop the tax reductions that companies have been getting by conducting their businesses in countries with low tax rates.
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