Meetings of finance ministers follow change in US stance, with consensus growing on tackling tax avoidance
G20 finance ministers are exploring a global minimum tax on corporate profits, amid growing international consensus on tackling avoidance after the pandemic.
The virtual meetings between the group of 20 major industrial nations come after the US made the case for an international base rate this week, in a move by the Biden administration to end US resistance to international tax reforms.
According to Reuters, France and Germany have signalled support for the US approach, which could after years of political wrangling pave the way for an agreement on global tax changes this summer.
The German finance minister, Olaf Scholz, said: “I’m in high spirits that with this corporate taxation initiative, we’ll manage to put an end to the worldwide race to the bottom in taxation.”
His French counterpart, Bruno Le Maire, who had clashed with Washington over international taxation while Donald Trump was president, said he welcomed the change in the US position. “A global agreement on international taxation is now within reach,” Le Maire said. “We must seize this historic opportunity.”
Moves to change the global tax system follow the proliferation of profit shifting by multinationals and large online tech firms.
The G20 meeting, attended by Rishi Sunak, the UK chancellor, is part of talks on the sidelines of the International Monetary Fund and World Bank spring meetings. The summit is also expected to approve a $650bn (£470bn) increase in the IMF’s emergency reserves to help developing countries with the fallout from Covid-19.
The meetings come as countries across the world work towards reaching an agreement on corporate tax reform through the Organisation for Economic Co-operation and Development in time for a July summit of G20 finance ministers.
The work is based on two key pillars. The first is aimed at addressing challenges posed by digitalisation and big tech firms operating across borders, and will be used to determine where taxes are paid.
In an attempt to crack down on profit shifting to low-tax jurisdictions, taxing rights could be granted to a portion of a multinational’s profits based on where its customers reside, irrespective of the company’s physical presence in that location. Frustrated by a lack of progress after years of negotiations, several countries including the UK and France have launched unilateral digital services taxes.
The second pillar centres on creating a global minimum tax rate, an area in which global progress has typically stalled because many countries, including Ireland and the Netherlands, use lower tax rates to attract international investment.
At a press conference on Tuesday, the Irish finance minister, Paschal Donohoe, said: “The focus on a global minimum tax rate is a prospect that I do have reservations about … on what would be the impact of that on the competitiveness for smaller- and medium-sized economies that do have lower rates of corporate taxation and use that as part of their overall competitive model.”
Ireland has a corporate tax rate of 12.5%, which is among the lowest in the world. Several UK overseas territories and crown dependencies have low or zero corporate tax rates, including the Cayman Islands and Guernsey.
It is understood the UK Treasury recognises the need for international agreement on a global minimum tax rate, although ministers want to make sure any solution is balanced and appropriately targeted.
A spokesperson said the Treasury supported the OECD’s work, although suggested a deal on tackling profit shifting was most important. “Reallocating profits so large digital businesses are taxed in the countries where they make sales remains the UK’s focus,” they said.
Tax campaigners said the US push, which is being spearheaded by the US Treasury secretary, Janet Yellen, marked a significant shift for economic policy after decades of Washington promoting lower taxes and looser government intervention.
Yellen’s plan envisages a 21% minimum corporate tax rate, coupled with eliminating exemptions on income from countries that do not enact a minimum tax to discourage the shifting of jobs and profits overseas.
Paul Monaghan, the chief executive of the campaign group Fair Tax Mark, said the US stance had opened up a once in a generation opportunity. “This could pull the rug from tax havens the world over as it would make profit-shifting a waste of time,” he said. “The devil will, as ever, be in the detail, and we can expect the likes of Facebook to fight this tooth and nail.”
Robert Palmer, the executive director of Tax Justice UK, said: “The call from President Biden to end the race to the bottom on corporate tax rates is a powerful shot across the bows for major companies that currently manage to slash their tax bills. It also helps to explain why Rishi Sunak felt comfortable announcing a planned increase in the UK’s corporate tax rate to 25% in 2023.”