US President Joe Biden talks about his government’s commitment to donate 500 million doses of the Pfizer (PFE.N) coronavirus vaccine to the world’s poorest countries during a visit to St. Petersburg. Ives in Cornwall, UK, June 10, 2021.
Kevin Lemarque | Reuters
The executives will also announce a plan to replace Digital Services Taxes, targeting the largest U.S. technology companies, with a new tax plan linked to the places where multinational companies actually do business, rather than where they are headquartered.
For the Biden administration, the global minimum tax plan represents a concrete step towards its goal of creating what it calls a “foreign policy for the middle class.”
This strategy aims to ensure that globalization and trade are exploited for the benefit of working Americans and not just billionaires and multinational corporations.
For the rest of the world, GMT is meant to end the tax-saving arms race that has caused some countries to lower their corporate taxes much lower than others to attract multinational corporations.
If adopted broadly, GMT would effectively end the practice of global corporations seeking low-tax jurisdictions such as Ireland and the British Virgin Islands to relocate their headquarters to, even if their customers, operations and executives are located elsewhere.
The second major initiative that Biden and G-7 leaders will announce on Friday is a plan they are “actively considering” to expand the International Monetary Fund’s range of special drawing rights, an internal IMF currency available to low-income countries.
This plan aims to extend international development funding to poor countries and help them buy Covid vaccines and recover more quickly from the effects of the pandemic, according to a White House fact sheet.
The White House also said G-7 leaders will agree to “continue to provide political support to the global economy for as long as is necessary to create a strong, balanced and inclusive economic recovery.”
But it is the GMT plan that has the greatest potential to influence corporate bottom lines and influence investor decisions.
The G-7 tax deal “will act as a springboard to get a broader deal on the G-20,” a senior official said, speaking to reporters about the background to the ongoing talks.
A joint statement issued Thursday by Biden and British Prime Minister Boris Johnson provides an example of what to expect from the global tax deal between the G-7 partner countries.
The Prime Minister of the United Kingdom Boris Johnson speaks with US President Joe Biden during their pre-G7 summit in Carbis Bay, Cornwall, United Kingdom on 10 June 2021.
Toby Melville | Reuters
“We are committed to reaching a fair solution to the allocation of tax rights, with market countries being allocated tax rights of at least 20% of profits, exceeding the 10% margin for the largest and most profitable multinationals,” the statement said.
“We also commit to a global minimum tax of at least 15% for each country.”
As part of this agreement, “we will ensure … the removal of all digital service charges and other relevant similar measures at all companies.”
The removal of taxes on digital services, a patchwork of country-by-country taxes specifically targeted at the largest U.S. technology companies, represents a real victory for the United States.
Analysts say the removal of these taxes – and an end to the looming threat of new summer time – would add a level of security to the international tax system that would ultimately benefit Big Tech companies in the long run, even if a new global minimum tax raising costs in the short term.
Once the G-7 leaders have adopted the GMT proposal, the next step is to gain support for it among G-20 nations, a diverse group of economies that includes China, India, Brazil and Russia.
G-20 finance ministers and central bank governors are scheduled to meet in Venice, Italy, in July. The IMF financing proposal and the international tax plan are both expected to be high on the agenda.
It is unclear at this time whether the GMT plan will gain support from the 19 member states and the European Union.
Details of the plan have yet to be hammered out, and some G-20 countries are keeping corporate tax rates relatively low in an attempt to lure companies.
Much of the basis for the adoption of a GMT has already been laid by the Organization for Economic Co-operation and Development or the OECD, which in the autumn published a plan outlining the two-pillar approach to international taxation.
The OECD Inclusive Framework on Base Erosion and Profit Shifting, known as BEPS, is a product of negotiations with 137 member countries and jurisdictions.
A pillar is the plan for countries to collect taxes from multinational companies based on the share of the company’s profits that comes from a particular country’s consumers.
The second pillar is the global minimum corporate tax, a fixed rate of at least 15% that would apply even when tax rates in a particular country are lower than that.