(CMR) The G-7 group of advanced economies reached a historic deal on Saturday to make multinational companies pay more tax in countries where they do business but have no physical headquarters.
Finance ministers meeting in London agreed to battle tax avoidance by making companies pay more in the countries where they do business. They also agreed in principle to a global minimum corporate tax rate of 15% to avoid countries undercutting each other, BBC reported.
According to the report, the deal announced on Saturday between the US, the UK, France, Germany, Canada, Italy, and Japan, plus the EU, could see billions of dollars flow to governments to pay off debts incurred during the COVID-19 crisis.
This deal is also expected to put pressure on other nations to follow, including at a meeting of the G20 next month, which includes China, Russia, and Brazil.
BBC Economics Editor Faisal Islam explained how this new minimum tax system would work. He pointed out that “at the moment companies can set up local branches in countries that have relatively low corporate tax rates and declare profits there. That means they only pay the local tax rate, even if the profits mainly come from sales made elsewhere. This is legal and commonly done.”
Islam explained that the G7 deal aims to stop this from happening in two ways, by making companies pay more tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits, and by having a global minimum tax rate so as to avoid countries undercutting each other with low tax rates.
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