07 Jun 2021 19:20 IST

Taxes are good first, knotty global step forward

A G7 accord on a 15 per cent minimum corporate tax, plus at-source levies on big firms helps rich nations shore up pandemic-hit coffers

It’s time for Corporate Earth to pay up. Meeting in person for the first time since the pandemic begun, finance ministers of seven of the planet’s richest big nations struck a common-sense deal on a tax issue that has divided them for years. The result is a step toward improving global equity, and perhaps a prelude to resolving knottier, multilateral problems.

Britain, Canada, France, Germany, Italy, Japan, and the US whose revenues are being eroded by tax havens, would be top beneficiaries of the agreement to impose a 15 per cent minimum tax on the profits of large companies. The proceeds will help replenish coffers hit by Covid-19: EU Tax Observatory estimates an annual uplift of about $50 billion for America alone.

Tech companies and taxes

A kicker allows governments to levy “the largest most profitable” companies at source regardless of whether they maintain a physical presence in a country. That aims at replacing taxes on digital service revenues of the likes of Google-owner Alphabet that have been introduced in Europe and beyond by states frustrated by the lack of a global tax policy appropriate for a digital age.

Ensnaring tech giants will require some creative definitions, however. Take Amazon. Its pre-tax profit during the March quarter was $10.3 billion on $109 billion of net sales, implying a margin below the discussed 10 per cent threshold beyond which other countries will gain taxing rights.

Revising harder multilateral challenges

It will be a big lift getting a deal across the finishing line. US President Joe Biden will burn political capital winning over Congress; the minimum tax agreed is lower than the 21 per cent he proposed. In the wider Group of 20 nations meeting next month, European Union low-tax members like Ireland and Hungary might push for exemptions. Developing countries whose statutory rates are higher could baulk. Even once an agreement is done, tax havens can dream up new wheezes to attract multinationals. Even so, companies are listening to the mood music: Facebook expects to pay more money in more countries.

But unity on tax lends credibility to achieving other ambitious goals, principally in combatting climate change. The Group of Seven supports forcing mandatory disclosures on climate-related risks and sees merit in creating a global reporting standard. Fixing advanced-nation policies on carbon border adjustments without unduly punishing emerging markets like China and India looks particularly fraught. Agreeing on tax is a good first step.