The G7 has agreed a deal on tackling corporate tax avoidance by big tech companies.
“It’s a proud moment,” said Chancellor Rishi Sunak as G7 finance ministers committed to a global minimum tax of at least 15%.
Speaking after two days of talks in London, Mr Sunak said the deal “meant the right companies pay the right tax in the right places”.
He called it a “historic agreement that finally brings our global tax system into the 21st century”, adding: “We’re going to level the playing field and inject some fairness into the system.”
The changes would also ensure major corporations, especially those with a strong online presence, will pay taxes in the countries where they operate and not only where they have headquarters.
Rich nations have struggled for years to agree a way to raise more revenue from large multinationals such as Google, Amazon and Facebook, which often book profits in jurisdictions where they pay little or no tax.
Sky’s economics and data editor Ed Conway said there were two parts to the deal.
“It’s slightly complicated but actually this detail really matters because this is about trying to prevent billions of dollars, if not trillions, of tax avoidance by the world’s biggest companies,” he said.
“The broad thrust is two things, first of all a global minimum rate for corporation tax and this is set at a minimum of 15%, so could go up from that but starting at 15%, and essentially this means anyone signing up to this has to agree they’re not going to cut their corporation tax rate below that level.
“And the second thing is trying to change the way that those taxes are calculated in apportion between different countries. Remember, of course at the moment taxes are mostly based on profit – so what a company for instance like some of the tech giants actually earns in profits, but as we all know you can shift those profits far more easily than you can your sales, which typically happen in a given country.
“The idea behind the other bit of this agreement is that with companies with a profit margin of over 10% – so companies that are making a lot of profit – above that level you will take 20% of those profits, so a fifth of those extra profits above that level, and reallocate them on the basis of sales to different countries around the world.
“That is equally, if not more of a big deal, as the global minimum.
“Put those two things together and you have perhaps the most convincing attempt at trying to deal internationally with what’s going on with the tech giants and their tax payments.
“So this is a big deal, it really is genuinely a big deal, and the work to try and get this done has been going on for some years, if not decades before this.
“On the other hand it’s easy to be sceptical and the rate – 15% – is a lot lower than it was originally expected to be. It was originally going to be 21%, now it’s 15%, that’s less ambitious than that.”
A Treasury spokeswoman explained how the most profitable multinationals would have to pay tax in the countries where they operate and not just where their headquarters are.
“The rules would apply to global firms with at least a 10% profit margin – and would see 20% of any profit above the 10% margin reallocated and then subjected to tax in the countries they operate,” she said.
“The fairer system will mean the UK will raise more tax revenue from large multinationals and help pay for public services here in the UK.”
Mr Sunak said there had been “huge progress” on an issue that had been discussed for nearly a decade.
The agreement is now set to be looked over in more detail at the G20 financial ministers and Central Bank governors meeting in July.
The deal is likely to cause tensions with Ireland, as it has so far been unwilling to raise its corporation tax rate above 12.5%.
Ireland’s finance minister Paschal Donohoe tweeted: “I note the joint position by #G7 finance ministers on international corporate taxation. It is in everyone’s interest to achieve a sustainable, ambitious and equitable agreement on the international tax architecture.
“I look forward now to engaging in the discussions at @OECD. There are 139 countries at the table, and any agreement will have to meet the needs of small and large countries, developed and developing.”
Meanwhile, Labour called on the government to push for more than the 15% base rate, after US President Joe Biden had initially wanted 21% minimum, which the party said would raise £131m for public services.
“This government must now show leadership, push for a 21% rate in negotiations, and use the money to fund our schools and our NHS,” said shadow chancellor Rachel Reeves.
The Adam Smith Institute – a pro-free market think tank – said the chancellor had effectively tied his own hands while handing “power over our taxes to Washington’s demands”.
“These proposals are not in the UK’s interest and Rishi has sold Britain short,” said deputy director Matt Kilcoyne.
“Rishi Sunak’s flagship policies of super deductions and free ports are dead in the water. The chancellor’s own policies, scuppered by his own hubris.”