G7 Tax Deal-A change for good?

Introduction

Most of us as individuals pay tax but many big companies don’t or pay lesser than they should. Now, a landmark tax deal aims to stop corporate tax dodging. G7 nations(US, UK, Germany, France, Canada, Italy, and Japan) agreed to set a minimum rate that will force the multinationals to pay their fair share. But who will be benefited, remains the inside story. Doing business in one country and shifting the profits to an offshore haven and pay little or no corporate tax is much controversial, but the world’s biggest companies have been doing this for years. Now the G7 group of so-called advanced economies, the leading industrial nations are trying to stop the unethical practices by tech giants. They agreed to set a minimum corporate tax rate of 15 percent. Some of the multinational firms targeted include; Amazon, Facebook, and Google.

What led to the tax deal?

Major tech giants have been criticized for exploiting global tax loopholes while reaping huge profits not least during the pandemic. Recently, a commitment by G7 finance ministers to force some of the richest companies in the world into paying their fair share announced that- Today after years of discussion G7 finance ministers have reached a historic agreement to reform the global tax system to make it fit for the global digital age. But crucially to make sure, that many countries are desperate to plug holes in their finances caused by the covid-19 pandemic. While many nations have been sinking deeper into debt; the pandemic was a windfall for big tech companies such as Amazon and Google that raked in huge profits at the moment. Companies are built on their earnings in the countries where they operate but this old way of doing things is no longer fit for the purpose. Largely because it’s exploited widely by multinational companies that operate in various different competing tax zones. All they need to do is declare their profits where the tax is at its lowest or indeed, where there are no taxes at all and it’s all completely legal. But G7 finance ministers said that it is high time to level the playing field by introducing a flat 15 percent rate on businesses to help pay back the pandemic debt that global minimum tax would end the race to the bottom in corporate taxation and ensure fairness for the middle class and working people in the U.S. and around the world. 

Benefits of the tax deal

Tax evasion will be more difficult for big companies all over the world and this is a good message for the people of our countries and especially the big tech guy and giants will have to pay for their fair share. Google, which has been bracing for a global tax hike for some time, said it strongly supported the work being done to update international tax rules and it hopes that countries continue to work together to ensure a balanced and durable agreement between the companies and the government.

Soon while Facebook said it wanted the international tax reform process to succeed while recognizing it could mean paying more tax in different places. The big challenge now comes with getting enough economies on board to make the plan work including countries such as Ireland, where low corporate tax rates have enticed several big businesses including google to build their European headquarters there. The talks at G7 will be continued at the G20 summit later this year.

A Loophole

Let’s look at why tech firms such as Amazon, Google, and Facebook have been accused of dodging taxes while all have their headquarters in the United States of America. Amazon reported a profit of 20 billion dollars in America last year. It paid 9 of that in taxes well below the official corporate rate of 21 percent. Its European division based in Luxembourg paid no corporate taxes at all in 2017. Google was accused of moving nearly 23 billion dollars to a shell company in Bermuda to reduce its foreign tax bill. And last year the U.S. tax agency sued Facebook to claw back nine billion dollars in unpaid taxes but the trial was cancelled due to the pandemic.

Problems Ahead

The G7 seems to be banging their own drum that they’ve achieved and agreed in principle on leveling tax loopholes. They are singing their own praises far too early. Well, it is a bit early in the day. This is obviously progress but there are a lot of problems still to be ironed out. First, the agreement is among seven countries and we have more than 200 tax jurisdictions in the world. Many of which have zero taxes or taxes below the 15 percent. So, the first question is, whether it will be possible to get everybody onto the same sheet or whether some of the traditional tax havens will try to resist that. Another problem is that even above the 15 percent you have a lot of variation in tax rates and so even if everybody has at least 15 percent there is still the problem of corporations trying to go shopping for cheaper tax rates trying to pay 15 percent rather than 30-35 percent or even up to 50 percent in some jurisdictions. 

Impact on India

Some experts in India believe that the move by G7 countries will benefit India. India, in September 2019 had slashed corporate tax for domestic companies to 22 percent and to 15 percent for new domestic manufacturing units. The concessional tax rate was extended to existing domestic industries, subject to certain conditions. Since India’s effective tax rate is above the global minimum tax rate, it would not impact companies doing business in India. The global minimum rate impacts companies using low-tax jurisdiction to achieve low global tax costs. Moreover, India attracts foreign investment owing to its large internal market, quality labor at competitive rates, strategic location for exports, and a thriving private sector.

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