G20 : Economic Cooperation ahead

G7 members endorse global minimum tax

Note4Students

From UPSC perspective, the following things are important :

Prelims level : G7, Global Minimum Tax

Mains level : Global Minimum Tax negotiaitions

Finance Ministers from the Group of Seven (G7) rich nations have reached a landmark accord setting a global minimum corporate tax rate, an agreement that could form the basis of a worldwide deal.

Why a global minimum?

  • Major economies are aiming to discourage multinationals from shifting profits — and tax revenues — to low-tax countries regardless of where their sales are made.
  • Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.
  • With its proposal for a minimum 15% tax rate, the Biden administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage, allowing competition on innovation, infrastructure and other attributes.

Where are the talks at?

  • The G7 talks feed into a much broader, existing effort.
  • The OECD has been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion, including a global corporate minimum tax.
  • The OECD and G20 countries aim to reach a consensus on both by mid-year, but the talks on a global corporate minimum are technically simpler and less contentious.
  • If a broad consensus is reached, it will be extremely hard for any low-tax country to try and block an accord.

How would a global minimum tax work?

  • The global minimum tax rate would apply to overseas profits.
  • Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the minimum rate.
  • This would eliminate the advantage of shifting profits.

What about that minimum rate?

  • Talks are focusing on the U.S. proposal of a minimum global corporation tax rate of 15% – above the level in countries such as Ireland but below the lowest G7 level.
  • Any final agreement could have major repercussions for low-tax countries and tax havens.
  • The Irish economy has boomed with the influx of billions of dollars in investment from multinationals.
  • Dublin, which has resisted EU attempts to harmonize its tax rules, is unlikely to accept a higher minimum rate without a fight.
  • However, the battle for low-tax countries is less likely to be about scuppering the overall talks and more about building support for a minimum rate as close as possible to its 12.5% or seeking certain exemptions.

Back2Basics: G7

  • The G7 or the Group of Seven is a group of the seven most advanced economies as per the International Monetary Fund (IMF).
  • The seven countries are Canada, USA, UK, France, Germany, Japan and Italy. The EU is also represented in the G7.
  • These countries, with the seven largest IMF-described advanced economies in the world, represent 58% of the global net wealth ($317 trillion).
  • The G7 countries also represent more than 46% of the global gross domestic product (GDP) based on nominal values, and more than 32% of the global GDP based on purchasing power parity.
  • The requirements to be a member of the G7 are a high net national wealth and a high HDI (Human Development Index).
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