G7 (Group of seven) advanced economies recently signed a landmark deal on taxing multinational companies.
The meeting, hosted at an ornate 19th-century mansion near Buckingham Palace in central London, was the first time finance ministers have met face to face since the start of the pandemic.
- The finance ministers of the world’s most advanced economies met in London and agreed to counter the tax avoidance through the measures in order to make firms pay in the nations where they do business.
- As per the deal, minimum global tax rate would be at least 15%.
- Companies will also have to pay more tax in the countries where they make sales.
- The agreement will now be discussed in detail at a meeting of G20 financial ministers and central bank governors in July 2021.
Minimum Global Tax Rate:
- Under the new tax system, countries, where big firms operate, would get the ‘right to tax’ at least 20% of profits.
- Ireland with tax rate of 12.5 percent is opposing the deal arguing that it would be disruptive to its economic model.
What are the reasons for the proposal of the new system?
- The old system of global taxation was being criticized over the years as it allowed big companies to save billions of dollars in tax bills by shifting their jurisdictions.
- Major digital companies were making money in multiple countries and paying taxes only in their home country.
- Thus, this proposal was made which would impose an additional tax on several multinational companies and technology giants like Facebook, Amazon and Google to pay taxes to countries based on where their goods or services are sold irrespective of their physical presence there. The deal seeks to modernize century-old international tax code.
- According to the Tax Justice Network report, the US Treasury loses nearly $50 billion a year to tax cheats with Germany and France also among the top losers.
- India too faces annual tax loss due to corporate tax abuse which is estimated at over $10 billion.
Impact on India:
- India is likely to benefit from global minimum 15% corporate tax rate deal because, effective domestic tax rate is above this threshold and it would continue to attract investment.
- The Group of Seven (G7) is an informal club of wealthy democracies consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
- The organization was established on 25 March 1973.
- The heads of government of the member states, as well as the representatives of the European Union, meet at the annual G7 Summit.
- Russia joined in 1998, creating the “G8”, but was excluded in 2014 for its takeover of Crimea.
- The G7 leaders aim to address challenges affecting the growth of the world economy, like slowdowns in emerging markets and drops in price of oil.
- The first six countries were the original members of the G6.
- Its first summit was held at Rambouillet, France, in 1975.
- Canada joined in 1976, making it the G7.