A landmark deal struck by rich nations to make multinational companies pay more tax has been criticised by campaigners for not going far enough.
G7 finance ministers meeting in London agreed to battle tax avoidance by making big companies pay more tax in the countries where they do business.
Tech giants firms likely to be impacted have welcomed the new rules.
But the charity Oxfam says an agreed 15% global minimum corporate tax rate is “far too low” to make a difference.
The deal announced on Saturday between the G7 group of wealthy nations – US, the UK, France, Germany, Canada, Italy and Japan, plus the EU – could see billions of dollars flow to governments to pay off debts incurred during the Covid crisis.
UK Chancellor of the Exchequer Rishi Sunak, who hosted the summit, said the agreement would create “a fairer tax system fit for the 21st Century”.
The deal agreed in principle that multinational companies pay a minimum tax rate of at least 15% in each country they operate.
But aid charities said the agreed rate is too low and would not stop tax havens from operating.
“It’s absurd for the G7 to claim it is ‘overhauling’ a broken global tax system by setting up a global minimum corporate tax rate that is similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore,” said Oxfam’s executive director Gabriela Bucher. “They are setting the bar so low that companies can just step over it.”
She said the deal was unfair as it would benefit G7 states, where many of the big companies are headquartered, at the expense of poorer nations.
Alex Cobham, chief executive of the Tax Justice Network, called the deal a “turning point” but said it remained “extremely unfair”.
“We’ve got one step of the way today – the idea of a minimum tax rate – what we need is to make sure that the benefits of that, the revenues, are distributed fairly around the world,” he told the BBC.
Why did they want to change the rules?
Governments have long grappled with the challenge of taxing global companies operating across many countries.
That challenge has grown with the boom in huge tech corporations like Amazon and Facebook.
At the moment companies can set up local branches in countries that have relatively low corporate tax rates and declare profits there.
That means they only pay the local rate of tax, even if the profits mainly come from sales made elsewhere. This is legal and commonly done.
The deal aims to stop this from happening in two ways.
Firstly the G7 will aim to make companies pay more tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits.
Secondly, they want a global minimum tax rate so as to avoid countries undercutting each other with low tax rates.
The right to tax is the essence of sovereign power. That is why co-ordinated international action is so difficult.
It has been the dream of campaigners and mainly European finance ministers for years. They would scarcely have believed it was possible until the past few months. But the need to fill coffers emptied by the pandemic, and the arrival of the Biden administration in the US, created a moment of opportunity.
There was, however, a big compromise to get this across the line. A minimum corporation tax rate of 15% is rather low. Although European finance ministers succeeded in including the phrase “at least 15%”, which offers a path to get that number higher.
How much bite this change actually has will depend on the fine print of ongoing negotiations. Tech firms say they welcomed the move. Facebook vice president Nick Clegg said they recognised it could mean the company “paying more tax, and in different places”.
And then there is the question of the rest of the world. This now goes from the G7 to the wider G20 group, including China, Russia and Brazil, and then beyond.
A process has begun, a precedent has been set. It may or may not end up being transformative, but this moment is historic.
How would the agreement work?
The rules on making multinationals pay taxes where they operate – known as “pillar one” of the agreement – would apply to global companies with at least a 10% profit margin.
Twenty percent of any profit above that would be reallocated and taxed in the countries where they operate, according to the G7 communiqué.
US Treasury Secretary Janet Yellen said there was an understanding that national digital services taxes such as those levied by the UK and EU countries would be scrapped and replaced by the new agreement. Such taxes are regarded by the US as unfairly targeting American technology giants.
“The timing remains to be worked out exactly but there is broad agreement that these two things go hand in hand,” the treasury secretary said.
Low-tax Ireland – which risks losing out from the deal – says the concerns of smaller countries must be heeded.
How have the corporations reacted?
Tech giants gave it an upbeat assessment.
“We want the international tax reform process to succeed and recognise this could mean Facebook paying more tax, and in different places,” said Facebook’s Nick Clegg.
A spokesperson for Amazon said the agreement is a “step forward” in bringing “stability to the international tax system”.
A spokesperson for Google said: “We strongly support the work being done to update international tax rules. We hope countries continue to work together to ensure a balanced and durable agreement will be finalised soon.”