G7 finance ministers have reached an agreement on a global minimum corporate tax rate. The agreement aims to set the global rate to 15%.
The policy would have significant implications for how global tech giants are taxed. A global digital services tax has been a highly contentious diplomatic issue recently. Analysts have urged global cooperation for some time, to prevent a host of unilateral and potentially incompatible digital services taxes in different countries.
The mooted global minimum tax could have important implications for how countries develop their frameworks for digital services taxes and VAT on digital services. Indeed, lawmakers may need to phase out digital services taxes as a condition of the new global tax rate.
While the agreement is highly significant, the 15% rate is lower than some experts suggest. Economist Joseph Stiglitz has called for a 21% rate. According to Stiglitz, a 21% global minimum rate “could generate significant global revenues, at least equal to the $240bn underpaid annually, but could even be as high as $640bn, according to recent research.”
“Race to the bottom”
The minimum tax rate is not just aimed at tech companies. More broadly, corporations that make money off of intellectual property royalties have moved their operations to countries that offer lower tax rates.
Differential global tax rates, combined with loopholes in global tax law, also enabled giant firms to take advantage of schemes such as the “Double Irish, Dutch sandwich” to delay paying US taxes.
US Treasury Secretary Janet Yellen characterised the situation as a “30-year race to the bottom on corporate tax rates”.
A minimum global corporate rate therefore aims to create a more level playing field.
Can countries set their own tax rates?
The proposed minimum global tax wouldn’t necessarily seek to dictate a country’s domestic corporate tax rate. Rather, if the rate on a firm’s overseas profits were set below the global minimum, the country in which that firm is based would be entitled to apply additional taxation on those profits.
Is the global minimum corporate tax rate a done deal?
The G7 agreement is a significant milestone. However, there is still a lot of work to do to reach global consensus.
The OECD is also currently developing a framework for a global minimum tax.
A VAT solution for every outcome
Vatglobal is carefully monitoring global policy. While tax global policy seems due for an overhaul, one thing remains clear: VAT has become a policy tool of choice for many countries.
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