• Thu. Jan 27th, 2022


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Global Tax Deal Reached Among G7 Nations

LONDON — The top economic officials from the world’s advanced economies reached a breakthrough on Saturday in their yearslong efforts to overhaul international tax laws, unveiling a broad agreement that aims to stop large multinational companies from seeking out tax havens and force them to pay more of their income to governments.

Finance leaders from the Group of 7 countries agreed to back a new global minimum tax rate of at least 15 percent that companies would have to pay regardless of where they locate their headquarters.

The agreement would also impose an additional tax on some of the largest multinational companies, potentially forcing technology giants like Amazon, Facebook and Google as well as other big global businesses to pay taxes to countries based on where their goods or services are sold, regardless of whether they have a physical presence in that nation.

Officials described the pact as a historic agreement that could reshape global commerce and solidify public finances that have been eroded after more than a year of combating the coronavirus pandemic. The deal comes after several years of fraught negotiations and, if enacted, would reverse a race to the bottom on international tax rates. It would also put to rest a fight between the United States and Europe over how to tax big technology companies.

Rishi Sunak, Britain’s chancellor of the Exchequer, announced the agreement and hailed it as a deal that would make the global tax system “fit for the global digital age” and would ensure “the right companies pay the right tax in the right places.”

While the agreement is a major step forward, many challenges remain. Next month, the Group of 7 countries must sell the concept to finance ministers from the broader Group of 20 nations that are meeting in Italy. If that is successful, officials hope that a final deal can be signed by Group of 20 leaders when they reconvene in October.

Garnering wider support will not be easy. Ireland, which has a tax rate of 12.5 percent, has come out against the global minimum tax, arguing that it would be disruptive to its economic model. Some major countries such as China have been quietly tracking the proceedings but are considered unlikely to buy in. Finance officials believe that if enough advanced economies sign on, then other countries will be compelled to follow suit and they plan to exert political pressure on Ireland to join the agreement.

The Biden administration has been particularly eager to reach an agreement because a global minimum tax is closely tied to its plans to raise the corporate tax rate in the United States to 28 percent from 21 percent to help pay for the president’s infrastructure proposal.

Business lobbyists and Republican lawmakers have warned that doing so will make American companies less competitive than their international counterparts and lead to more offshoring.

Treasury Secretary Janet L. Yellen and other administration officials have said that getting other countries to go along with a base tax rate on overseas profits would minimize any disadvantage to American companies and make them less likely to move their operations to countries with lower taxes.

She described the agreement as “significant” and “unprecedented.”

“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,” she said in a statement. “The global minimum tax would also help the global economy thrive, by leveling the playing field for businesses and encouraging countries to compete on positive bases, such as educating and training our work forces and investing in research and development and infrastructure.”

The Group of 7 delegations, which represent Britain, Canada, France, Germany, Italy, Japan and the United States, negotiated late into Friday to hash out details of how the new tax systems would work and the language in the statement.

France, which had been pushing for a tax rate above 15 percent, wanted to ensure that there remains flexibility for the tax to be higher. The United States was pushing European countries to eliminate their digital services taxes, which the administration says unfairly target American technology companies. France, Italy and Britain have resisted abandoning those taxes until the agreement is finished and in place — a process that could take up to four years.

The joint statement, or communiqué, released on Saturday suggested that the digital taxes would remain in place for now.

“We will provide for appropriate coordination between the application of the new international tax rules and the removal of all digital services taxes, and other relevant similar measures, on all companies,” the statement said.

To prevent individual countries from imposing dozens of digital taxes around the world, the agreement reached Saturday would apply a new tax to large businesses with a profit margin of at least 10 percent. The finance ministers agreed that the tax would be applied to at least 20 percent of profit exceeding that 10 percent margin “for the largest and most profitable multinational enterprises.”

At a news conference on Saturday, Ms. Yellen said she expected the largest American technology firms would face the levy. Still, Ms. Yellen said she anticipated that they would appreciate the additional certainty the deal would bring, even if it resulted in paying more taxes.

Bruno Le Maire, France’s finance minister, applauded the agreement as ambitious and said that his country would continue to push for a global minimum tax rate above 15 percent.

“This agreement will make it possible to tax the digital giants, and for the first time to implement a minimum corporate tax rate to crack down on tax dumping,” he said on Saturday. “As talks continue, France will aim for the highest possible minimum tax rate to put an end to the race to the bottom in certain countries.”

Huge sums of money are at stake. A report this month from the EU Tax Observatory estimated that a 15 percent minimum tax would yield an additional 48 billion euros, or $58 billion, a year. The Biden administration projected in its budget last month that the new global minimum tax system could help bring in $500 billion in tax revenue over a decade to the United States.

The plan could face resistance from large corporations and the world’s biggest companies were absorbing the development on Saturday.

“We strongly support the work being done to update international tax rules,” said José Castañeda, a Google spokesman. “We hope countries continue to work together to ensure a balanced and durable agreement will be finalized soon.”

Nick Clegg, the vice president of global affairs at Facebook, wrote on Twitter that “we want the international tax reform process to succeed and recognize this could mean Facebook paying more tax, and in different places.”

Manal Corwin, a former Treasury Department official in the Obama administration who now leads the Washington national tax practice at KPMG, said that the agreement that was published on Saturday leaves many unanswered questions about scope that are relevant to which companies will be covered. She pointed to the revenue threshold and whether companies will be required to segment lines of business in measuring margin and profit.

“Without answers to these open questions, it is difficult to determine which companies will be in or out,” Ms. Corwin said.

The agreement signaled a return to comity among the club of wealthy countries, which was fractured in recent years as the Trump administration imposed tariffs on American allies, but has regained its footing since President Biden took office. Last year, the Treasury secretary at the time, Steven Mnuchin, abandoned the talks after negotiations over the digital taxes stalled and President Donald J. Trump prepared retaliatory tariffs against countries that planned to tax American technology companies.

The negotiations regained momentum this year after Ms. Yellen offered new proposals that succeeded in breaking the gridlock. She suggested a global minimum tax rate of at least 15 percent and proposed replacing European digital services taxes with a new levy on the world’s largest 100 companies that would be based on where a company sells its goods or services, regardless of whether it also has a physical presence in those countries.

Mr. Le Maire said that Ms. Yellen’s involvement was pivotal.

“Let’s be clear, we have someone with whom it’s easy to discuss, easy to build compromises and easy to bridge some gaps between the different nations,” he said.

Ms. Yellen suggested that the success of the meeting was a sign that the days of “America First” were over.

“I believe what you are seeing is a revival of multilateralism,” she said.

Mathias Cormann, the secretary general of the Organization for Economic Cooperation and Development, said the agreement was a critical step toward gaining broader global acceptance of a minimum tax.

“There is important work left to do,” he said in a statement. “But this decision adds important momentum to the coming discussions among the 139 member countries and jurisdictions.”

Despite the breakthrough, completing such a sweeping agreement will not be easy and the threat of a trade war remains if countries keep their digital services taxes in place. The Biden administration said this month that it was prepared to move forward with tariffs on about $2.1 billion worth of goods from Austria, Britain, India, Italy, Spain and Turkey in retaliation for their digital taxes. However, it is keeping them on hold while the tax negotiations unfold.

Finishing such a large agreement by the end of the year could be overly optimistic given the number of moving parts and countries involved.

“A detailed agreement on something of this complexity in a few months would just be lighting speed,” said Nathan Sheets, a former Treasury Department under secretary for international affairs in the Obama administration.

The biggest obstacle to getting a deal finished could come from the United States. The Biden administration must win approval from a narrowly divided Congress to make changes to the tax code and Republicans have shown resistance to Mr. Biden’s plans. American businesses will bear the brunt of the new taxes and Republican lawmakers have argued that the White House is ceding tax authority to foreign countries.

Representative Kevin Brady of Texas, the top Republican on the House Ways and Means Committee, said on Friday that he did not believe that a 15 percent global minimum tax would curb offshoring.

“If the American corporate tax rate is 28 percent, and the global tax rate is merely half of that, you can guarantee we’ll see a second wave of U.S. investment research manufacturing hit overseas, that’s not what we want,” Mr. Brady said.

At the news conference, Ms. Yellen noted that top Democrats in the House and Senate had expressed support for the tax changes that the Biden administration was trying to make.

“We will work with Congress,” she said.

Liz Alderman contributed reporting from Paris.