On Saturday, the G7 group of economies announced a deal that would force large multinational companies to pay more tax. The leaders agreed to the deal in the hope that it would combat tax avoidance and ensure corporations contribute to the countries they operate in.
In addition to this, they agreed that there would be a minimum corporate tax rate of 15%. This would help to make sure countries don’t undercut each other.
This deal, which was reached between the US, the UK, France, Germany, Canada, Italy, and Japan, plus the EU, could mean billions of extra dollars reaching governments.
Going forward, the G7 will also put pressure on other countries to introduce similar laws. At the upcoming G20 summit next month, they will start to negotiate with other countries like Russia, China, and Brazil on a deal.
Which companies will be affected?
In the digital age, it’s important that tax rules are updated to reflect the new environment. Tech giants like Amazon and Facebook have grown in size, but governments have struggled to address the issue of taxing these companies when they operate in many countries.
At the moment, digital companies can set up local branches in countries with lower tax rates and declare profits there. This means that they pay lower corporate tax rates. This is a legal practice that’s commonly used by international companies.
The aim of the deal is to stop this happening by making companies pay tax in the countries they are selling their products and services in, rather than where they declare the profits.
It will also reduce the ability of countries to undercut each other. A global minimum tax rate would be introduced so individual countries can’t offer lower rates.
However, countries have the power to set their own tax rates, which means setting up an international tax on large technology firms has been challenging.
A minimum tax of 15% is still fairly low, but this compromise was needed to get the international deal approved by all members of the G7 group.