At Last: An International Agreement On Taxing Multinationals

Finally, after many rounds of talks over many months, the London G7 summit, attended by Canada, France, Germany, Italy, Japan, the United Kingdom, the United States and the European Union as a guest, reached a historic agreement to create a common corporate tax rate of 15% for companies with international activities, which will always be paid in the countries where the activity is generated, thus closing off the possibilities of tax engineering that allowed many companies to to pay virtually zero tax, despite huge profits.

The largest and most profitable multinational enterprises will now be taxed on at least 20% of profit exceeding a 10% margin. The unblocking of the talks and the possibility of reaching a solution is thanks to the proactive position of the Biden administration and Treasury Secretary Janet Yellen, who initially proposed a 21% rate. The agreement puts an end to more than 30 years of large multinational companies paying lower and lower tax rates, as countries around the world tried to attract them through a range of incentives.

The agreement must now be taken to the G20 summit in Venice in July. I have been saying for years that the only way to address the problems arising from rules dating back to the 1920s that for years have allowed multinational companies of all kinds to hack into national tax systems and employ aggressive tax optimization practices is through joint international action and curtailing the freedom of countries to set their tax policies unilaterally. In an interconnected world, solving global problems requires global action.

The agreement should generate billions of dollars in taxes around the world and an end to tax havens which will no longer be able to provide a refuge for companies that use cross-invoicing processes to their subsidiaries located there.

Large multinational companies will pay now find themselves paying 15% tax, instead of of less than 2% or 3% in many cases at a time when the world is embarking on economic recovery after a pandemic. The international scope of the agreement could also be the germ for tackling other global issues, such as the climate emergency: delegates to the meeting also agreed to move towards getting companies to report their environmental impact based on internationally agreed guidelines, giving investors more information about their activities, and preventing them, for example, from hiding their emission levels in countries with laxer legislation.

At last, a productive summit.