A deal was reached after years of debate: multinational companies will have to pay a global minimum tax of 15%. This decision was taken by the finance ministers of the G7, the seven world powers, in June 2021 and confirmed at the G20 in July. The deal seeks to lay down common minimum rules between states to prevent tax dumping between countries and regulate larger corporations. Companies with profit margins exceeding 10% will be taxed in each of the countries where they operate, not just where they are based. “A historic step towards greater equity and social justice for citizens”, commented Italian Prime Minister Mario Draghi.
The G7 press release also mentions that “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 EU Tax Observatory estimates that by adopting a 15% minimum tax, Italy could collect €2.7 billion in revenue from its multinationals, while the EU would get €48.3 billion overall.
A minimum tax aims at levelling out the tax contribution required in each country, thus overcoming the tax gap between different countries (i.e. what has attracted multinationals to establish their headquarters in some countries rather than in others).
Setting the percentage to 15% was the result of a long negotiation within the OECD.
The Irish, for example, have so far applied a rate of 15%. The United States under the leadership of President Joe Biden proposed rates of 21 or 25%, also with the aim of financing the ambitious USD 2 trillion US recovery plan. The measure comes in the context of great economic uncertainty in the wake of COVID-19, and the relative need for nations to recover.
“Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids. It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods”, said US Treasury Secretary Janet Yellen, a fervent supporter of the measure.
However, not everyone agrees on the appropriateness of 15% as a percentage to be taken from companies. Oxfam International’s executive director Gabriela Bucher, for one, says that “with this tax reform, the G7 and EU will pocket more than two-thirds of new cash that a global minimum corporate tax rate of 15 percent will yield”, while the “world’s poorest countries will recover less than 3 percent ―despite being home to over a third of the world’s population”.
Numerous experts, including the UN High Level Panel on International Financial Accountability, Transparency and Integrity (FACTI) and the Independent Commission for the Reform of International Corporate Taxation (ICRICT), are calling for the minimum percentage of global taxation to be raised to benefit the world’s poorest countries. According to this view, a tax of at least 25% would be appropriate. A few countries, including France and Germany, also share this view. Others, however, including the UK, were strongly opposed.
London, for example, secured an exemption for the City and its banks from the new tax regime. Meanwhile, seven nations around the world (including Hungary, Estonia and Ireland) are still opting out. “Each country can, of course, decide whether or not to agree, but the fact that countries accounting for over 90% of the world’s GDP have come to an agreement puts some pressure on all the others to join the effort”, commented Italian Economy Minister Daniele Franco.
Another major factor is that eight of the world’s top ten most highly capitalised multinationals are American, which means that the biggest weight in the balance is predominantly attributed to the United States. And in fact, it is indeed the US that has asked for the minimum tax to replace the web taxes that various countries, including Italy, have adopted. France has already declared that it will “remove its national tax on digital services as soon as the agreement is implemented at OECD level and becomes effective”. Italy, for the time being, has only raised €233 million from its web tax, significantly less than the €700 million initially planned.
The minimum tax agreement is expected to enter into force by 2023: This will not be an immediate route. The next step will now be the October G20 finance meeting in Washington, where the final parameters of the new fiscal architecture are set to be defined. However, while critics of the measure claim that the step taken, although too timid, is at least a first step, others, such as the pharmaceutical companies producing COVID vaccines, have already asked to be exempted from the tax. The match is therefore far from over.