I have written before about one method by which huge highly profitable corporations avoid taxes. The way it works is for a big company in the US (say) to buy a small company in a country that has favorable tax laws, Ireland being the current favored nation. They then ‘invert’ the relationship, claiming that the foreign company is the parent one while the US one is the subsidiary, even though nothing else has changed. This enables them to pay the lower taxes of the other nation while enjoying all the benefits of being in the US. This practice even has a name: ‘corporate perversion’.
Now the group of wealthy countries known as the G7 (Canada, France, Germany, Italy, Japan, UK, and US) has agreed to a system to address this scandalous practice.
The G7 group of wealthy nations have signed a landmark deal to tackle tax abuses by some of the world’s biggest multinationals and establish a minimum global corporation tax for the first time.
As part of the plan, finance ministers also agreed to the principle of a global minimum rate that ensures multinationals pay tax of at least 15% in each country in which they operate.
The US president, Joe Biden, initially proposed a minimum tax rate of 21%, but was persuaded to water down the plan to 15% to make it acceptable to a wider group of countries. Critics said the G7 had let multinationals off the hook with a tax rate that failed to prevent tax havens from undermining countries that set higher rates to pay for the extra costs incurred during the pandemic.
The agreement, which reverses several decades of beggar thy neighbour policies, is aimed at multinationals that have played one country against another to drive down the level of tax they pay.
Digital businesses such as Amazon, Google and Facebook, which have built huge businesses across the world while only declaring relatively small profits in each country, will also be caught by the agreement.
G7 leaders hope the agreement will be endorsed by the G20 group of nations, which includes China, Russia, South Africa and Saudi Arabia, later in the year.
More than 130 countries are participating in a parallel exercise to agree a global tax framework as part of a deal put together by the Paris-based Organisation for Economic Cooperation and Development (OECD), which is expected to follow the lead set by the G7 at meetings in October.
The US Congress would have to pass a law in order to adopt this policy and usually all Republicans and right wing Democrats would ally to block any attempt to raise the corporate tax rate.
But this is where there is an interesting wrinkle. Trump hates Amazon and Facebook and he may demand that his Republican lackeys in Congress pass this in order to hurt those companies, putting them in a bind as to whom they will be most servile, Trump or corporate America.