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Explainer-What is a global minimum tax and what will it mean?

Stock MarketsJun 05, 2021 08:15AM ET
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© Reuters. FILE PHOTO: Britain's Chancellor of the Exchequer Rishi Sunak speaks at a meeting of finance ministers from across the G7 nations ahead of the G7 leaders' summit, at Lancaster House in London, Britain June 4, 2021. Stefan Rousseau/PA Wire/Pool via REUTERS

By Leigh Thomas and David Lawder

(Reuters) - Finance Ministers from the Group of Seven (G7) rich nations reached a landmark accord on Saturday backing the creation of a global minimum corporate tax rate of at least 15%, an agreement that could then form the basis of a worldwide deal.

Such a deal aims to end what U.S. Treasury Secretary Janet Yellen has called a "30-year race to the bottom on corporate tax rates" as countries compete to lure multinationals.

WHY A GLOBAL MINIMUM TAX?

Major economies are aiming to discourage multinationals from shifting profits - and tax revenues - to low-tax countries regardless of where their sales are made.

Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.

GRAPHIC: Statutory corporate tax rates in OECD countries - https://graphics.reuters.com/OECD-TAX/oakpeldjxvr/chart.png

WHERE ARE THE TALKS AT?

The G7 accord feeds into a much broader, existing effort. The Organization for Economic Cooperation and Development has been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion, including a global corporate minimum tax.

The OECD and G20 countries aim to reach consensus on both by mid-year, but the talks on a global corporate minimum are technically simpler and less contentious. If a broad consensus is reached, it will be extremely hard for any low-tax country to try and block an agreement.

The minimum is expected to make up the bulk of the $50 billion-$80 billion in extra tax that the OECD estimates firms will end up paying globally under deals on both fronts.

HOW WOULD A GLOBAL MINIMUM WORK?

The global minimum tax rate would apply to overseas profits.

Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could "top-up" their taxes to the minimum rate, eliminating the advantage of shifting profits.

The OECD said last month that governments broadly agreed on the basic design of the minimum tax but not the rate. Tax experts say that is the thorniest issue, although the G7 accord creates strong momentum around the 15%-plus level.

Other items still to be negotiated include whether investment funds and real estate investment trusts should be covered, when to apply the new rate and ensuring it is compatible with U.S. tax reforms aimed at deterring erosion.

WHAT NEXT

A G20 meeting scheduled for Venice next month will see whether the G7 accord gets broad support from the world's biggest developing and developing countries.

Much still needs to be ironed out - including the metrics that will determine how and to which multinational companies the tax will be applied.

The G7 communique left open what will happen in the meantime to digital services taxes on big technology companies in various jurisdictions, which the United States wanted to be scrapped as soon as a deal was in place.

It said only that there should be "appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes".

Any final agreement could have major repercussions for low-tax countries and tax havens.

The Irish economy has boomed with the influx of billions of dollars in investment from multinationals. Dublin, which has resisted European Union attempts to harmonize its tax rules, is unlikely to accept a higher minimum rate without a fight.

However, the battle for low-tax countries is less likely to be about scuppering the overall talks and more about building support for a minimum rate as close as possible to its 12.5% or seeking certain exemptions.

GRAPHIC: Race to the bottom Race to the bottom - https://graphics.reuters.com/BRV-BRV/oakveldyxpr/chart.png

Explainer-What is a global minimum tax and what will it mean?
 

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Comments (13)
Mein Ki
Mein Ki Jun 05, 2021 11:27AM ET
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old pawnbrocker-lady is quite... Dostoyevskian.
Mein Ki
Mein Ki Jun 05, 2021 11:25AM ET
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old pawnbrocker-lady is quite Dostoyevskian
Eloy Rodrigo
Eloy Rodrigo Jun 05, 2021 11:24AM ET
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When I see Apple buying back $90 billion in its own shares I would tax its net income in at least 65%.The argument in favor of low income tax on corporates is that they will invest the money.We are not seeing this happening.
Yoyogi Shark
Yoyogi Shark Jun 05, 2021 11:24AM ET
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They are buying back shares and increased dividend. Everyone who gets the dividend will pay a tax on that. Shares that were bought back can be given to employees, executives, etc. who will pay tax when they sell them. Finally they can retire the securities and whoever owns "active" Apple shares will profit from that... when they sell their shares of course in which case they will pay a tax on that. Note that in both cases the company's profit is taxed twice. First time when they pay the corporate income tax and second time when a shareholder gets the dividend or sells the shares. Anyway, your argument regarding low tax existing only for the company to re-invest is invalid because the company is re-investing - in itself. Its employees and shareholders. What I think is more disgraceful here is that Apple issued corporate bonds that were then bought by the FED and they used like 5 billion of that money to buy back shares. The excess of liquidity in the market is forcing companies to do this
Ian RB
Ian RB Jun 05, 2021 11:24AM ET
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If the P/E ratio weren't so high your argument might hold water. The fact is that they buy back the shares just to drive their own price up. These companies are not letting it trickle down, and they employ based on efficiency and market value for the employees, not on the company's success. The current tax structure only lets the rich hoard more of the wealth. This is why the numbers of billionaires is increasing so quickly. We all have to pay taxes, this is just their share. 15% is a very low tax rate. These are welcome changes.
Yoyogi Shark
Yoyogi Shark Jun 05, 2021 11:24AM ET
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Ian RB  Taxes have nothing to do with the rich getting richer. I thought 2020 couldn't be more clear about that. Firstly, rich own assets. Nothing has changed in the tax structure between 2019 and 2021, yet asset prices first deflated to be later pumped to new record highs by central banks. I don't know how anyone in their right mind can say billionaires got richer in 2020 because of low taxes or tax evasion. What about other shareholders, individual investors, people buying stocks for their retirement? What about smaller companies that try to compete with those giants? Billionaires WANT higher taxes, they know that at a little expense they will get rid of newcomers and emerging competitors. Finally, who said governments will spend the money better than a shareholder?
Yoyogi Shark
Yoyogi Shark Jun 05, 2021 11:24AM ET
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Investing Man  You haven't read a word of what I said so I think further discussion is futile.
DrFunkenstein hayson
DrFunkenstein hayson Jun 05, 2021 10:31AM ET
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terrible idea. this is a race to the bottom. these 🤡🤡🤡are out of control. they're keynesian economics are in full on implosion and now like the last rats leaving a ship they are trying any scheme to steal more wealth. that's all this is, theft, which will be passed on to the people
Sean Livingstone
Sean Livingstone Jun 05, 2021 10:04AM ET
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The old world and the new world fail to realize that extreme overspending to support the economy then heavily tax profitable corporations are the concoction to economic decline, especially at an environment where the interest rate is near zero. If an economic recession hits again, there will be no more tools to shield the economy. The only adjustment is the inflation rate, so inflation has to skyrocket to cushion the high tax, huge debt and low interest rate. Give it 2-3 years, both worlds would be in decline.
James Leonard
James Leonard Jun 05, 2021 10:03AM ET
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This is just such a bad idea. Competition is what drives innovation and forces countries to look for ways to do things better and cheaper. If you take that away, you're going to get stagnation, exactly what occurred in the old Soviet Union. These governments are going to get paid, regardless of how crappy they run their countries. The other side of this, is the common working man is the one who is going to pay for this. Everyone who owns stock in these companies is going to take a hit to their retirement and investments. These taxes go right to the bottom line. Dividends will be lower, along with share prices. If you have a pension, if you own mutual funds or stocks, your future income will be lower.
christos rousakis
christos rousakis Jun 05, 2021 10:02AM ET
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for indices is bud or good news;
William Smith
William Smith Jun 05, 2021 9:56AM ET
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China jumping with joy. Corporations will flock to China. Meanwhile the price of everything produced will go up. destroying the middle class even more.
Petros Kazakidis
Petros Kazakidis Jun 05, 2021 9:56AM ET
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China has a tax of 25%.
leehiung chong
leehiung chong Jun 05, 2021 9:56AM ET
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and you can't lobby out from their taxes...
surely joking
surely joking Jun 05, 2021 9:55AM ET
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next up, global minimum wage
Leon Kelly
Leon Kelly Jun 05, 2021 9:54AM ET
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Poor Ireland. 30% of their GDP gone
Andrew Bevan
Andrew Bevan Jun 05, 2021 9:54AM ET
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Back to driving cars on spill oil from the chippy..
Vinicyus Oliveira
Vinicyus Oliveira Jun 05, 2021 9:31AM ET
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It means slavery.
Gonzalo Pascual Graf
Gonzalo Pascual Graf Jun 05, 2021 9:01AM ET
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Global comunism... politicians hunting for more money, favors and free lunches...
Lib Can
Lib Can Jun 05, 2021 6:13AM ET
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This is global socialism, next step global economic stagnation and poverty. Nobody is going to work hard and produce in abundance, so that later the government takes the benefits.
Mart Bab
Rubberduck1973 Jun 05, 2021 6:13AM ET
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Man you are so far off. Go to Reddit. Investing is for investors
Pupi Pi
Pupi Pi Jun 05, 2021 6:13AM ET
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Reddit investors are much better and smarter investors than "pro investors". GME, AMC,... are the best proof. 1600% up, while "professionals" struggle with billions of losses. Have a nice day pro!
 
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