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The G7 countries reached a landmark agreement on Saturday that aims to make it difficult for the world’s largest companies to avoid taxes.
As part of the deal reached at a G7 finance ministers’ meeting in London, members agreed to set a global corporate tax threshold of at least 15 percent, a move they believe will force companies to pay taxes in countries where instead of skimming profits offshore in tax havens, they generate their business.
While the G7, which includes the US, Japan, Canada and leading European countries, lacks the power to enforce global norms, the unification of seven of the world’s largest industrialized nations is seen as an important step towards a global corporate taxation deal .
“This is a truly historic deal and I am proud that the G7 has shown collective leadership at this crucial time in our global economic recovery,” said UK Chancellor Rishi Sunak, who chaired the meeting, in a statement.
US Treasury Secretary Janet Yellen said in a statement that a global minimum tax would end the “race to the bottom of corporate taxation.”
As part of what the G7 ministers called a “two pillar” strategy, the new framework would apply to large global companies with profit margins of 10 percent or more. These companies would have to pay taxes on 20 percent of the profits that they generate above the 10 percent threshold in the countries in which they generated the income.
The second pillar is the corporate tax rate of 15 percent, which ministers believe will create “a level playing field” by removing incentives to shift profits between countries to avoid taxes. Speaking to reporters on Saturday afternoon, Yellen argued that an enforcement mechanism for under-taxed payments would put pressure on tax havens to join the system.
“It has a way of bringing holdouts into play,” said Yellen.
The changes, if they came into effect, would have a particular impact on the world’s leading tech companies like Amazon, Facebook and Google, which have long managed to avoid taxes in many of the jurisdictions in which they operate.
Reform, long advocated by European countries such as France and Germany, gained momentum and made it a priority after US President Joe Biden took office in January.
After the G7 approved the plan, which has been discussed for several years, it is to be taken up at the next G20 meeting in Venice in July. Approval there – the G20 countries represent 80 percent of global GDP – would be an important step towards realizing the tax plan.
Aaron Lorenzo contributed to the coverage.