The minimum global corporate tax deal in context

Many commentators have described the G7 London agreement on new global taxation rules signed on 05 June as a historic event. In detail, the major industrialized countries have committed to:
 

• Award market countries "taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises";
• Implement “a global minimum corporate tax of at least 15% on a country by country basis".

The agreement also provides for the removal of all Digital Services Taxes, introduced in recent years by several European countries and which directly target US high-tech multinationals. In fact, the agreement signed by the G7 closely follows recent Biden Administration proposals. The compromise reached could mark the return of multilateralism in international relations after years of increasing isolationism on the part of the USA.

Beyond the hype with which the agreement has been presented, a few points are worth noting:
 

• The agreement is not yet operational and it will be a long time before it is;
• Not many details are provided in the G7 communiqué, a choice dictated by the need to leave room for future negotiations with other countries;
• In order for the agreement to be effective it is necessary that the main developed and emerging countries sign it, otherwise multinationals would easily find a way around it;
• The proposed global minimum rate of 15% is lower than the average rate in force in 2020, which could facilitate a large-scale agreement (see Chart1); 
• Many other details remain to be worked out before the new rules are applicable and one of the most important, and therefore a likely source of controversy, will be the method of calculating corporate taxable income.

Chart 1. Global average statutory corporate tax rate

Source: Tax Foundation

Negotiations will continue at the OECD conference on cross-border taxation on 30 June - 01 July, which will be attended by 139 countries, and subsequently at the G20 meeting on 09-10 July in Venice.

It should also be noted that the new taxation rules will apply only to multinationals, and in particular to their digital transactions. Furthermore, companies with an overall profit margin of less than 10% will not necessarily be protected under the deal if, for example, one part of their business is very high margin. It is in this context that the online services operated by Amazon Web Services will be treated separately from the groups' other activities and will be subject to taxation in the country where the profits were generated. Web multinationals would thus see their tax advantage reduced, but not eliminated, compared to other companies subject to ordinary local taxation.

Finally, some thoughts on the proposed level of 15% for the minimum corporate tax rate. Some commentators see this move as the beginning of the end for tax havens, including countries like Switzerland and Ireland that apply rates below the median of OECD countries. However, as Chart 2 shows, the difference between the rate actually paid in these countries and the proposed rate is not very large, and in the case of Switzerland the effective rate is even higher, at least at national level. It should also be considered that the tax rate applied to profits is not the only factor determining the choice of locations and investments by multinationals: the quality of the infrastructure, the availability of skilled labour, and legal certainty play an important role in the choices multinationals make regarding the location of their factories and registered offices.

Chart 2. 2019 effective corporate tax rate (%)

Source: OECD and EFGAM calculations.

In conclusion, history will tell if the deal on taxation of multinationals signed in London by the G7 is truly a historic event. While acknowledging that it represents a first, important step in resolving a problem that has created tension also between allied countries, such as Europe and the USA, it will take a long time, perhaps years, before the new tax system is defined and enters into force. What is clear from now is that the proposed level of taxation does not represent a disruptive threat to the prospects of large multinationals active in digital services which, unsurprisingly, have in fact welcomed the announcement.