The Era of Minimum Tax Rates Is Coming

By Xu Feibiao

At a meeting in London on June 5， finance ministers of the Group of Seven （G7） nations agreed to establish a global minimum tax rate of 15 percent for large multinational companies. The historic agreement demonstrates the growing willingness of the United States and European countries to cooperate in the context of rising populism， protectionism and deglobalization in the Western world. It is expected to bring profound changes to global tax governance， as well as to the global trade and economic landscape.

Contributing factors

International tax has long been a complicated issue. As early as the beginning of the 20th century， the double taxation of enterprises by multiple tax jurisdictions hindered the global free flow of goods and capital. Therefore， in order to address the multiple taxation issues and the allocation of taxing rights， an international tax rule system based on the Model Tax Convention on Income and on Capital of the Organization of Economic Cooperation and Development（OECD） was established under the dominance of the U.S. and European countries.

However， as economic globalization has progressed， the opportunities have increased for multinational companies to exploit legal discrepancies in different jurisdictions in order to avoid tax. This has led not only to unfair competition， but also to a loss in tax revenue for governments.

Since 2008， a new round of international tax governance reform was initiated by European countries. Between 2013 and 2015， the Group of 20 （G20） led the adoption of new tax rules based on the OECDs Base Erosion and Profit Shifting initiative in order to address problems of multiple non-taxation and tax evasion， and to promote fair competition. Many countries have also worked together to increase policy coordination， promote the unification of their tax systems， and stop attracting international investment through tax “wars.”

This new agreement between G7 nations on the global minimum corporate tax rate was made through multiple rounds of negotiation and compromise， after the U.S. proposal of 21 percent was rejected by the European EU members. Moreover， they have committed to coordinating their positions on digital service tax and promoting reform of international tax governance.

Against the background of international tax governance reform， domestic economic concerns and major-country competition were also at play in the forming of consensus within the G7.

G7 nations now bear heavy debts and financial burdens. In order to stimulate post-pandemic economic recovery， they urgently need tax system reforms to help reverse their fiscal imbalance and improve domestic business environment. Countries with lower corporate tax rates are seen as major obstacles to realize their goals.