G7 agrees urgent reform is needed on tax rules

G7 agrees urgent reform is needed on tax rules

G7 countries have agreed a compromise on how to change the international tax regime to ensure fair taxation of big multinationals, including tech giants such as Google and Facebook, according to the French hosts of a G7 meeting of finance ministers and central bankers.

“Ministers agreed that it is urgent to address the tax challenges raised by the digitalisation of the economy and the shortcomings of the current transfer pricing system,” said a French summary of the meeting’s conclusions.

Steven Mnuchin, US Treasury secretary, said: “We’ve made some significant progress at this meeting.” But he added: “There is still work to be done”.

Tech companies in particular are accused by many European governments of not paying fair levels of company tax in the countries where they operate because they can book profits in low-tax jurisdictions, unlike traditional companies with national headquarters and large numbers of local staff.

New rules will be developed in continuing negotiations at the OECD “to address new business models in particular those creating value with no physical presence, notably highly digitalised business models”, the summary of the G7 meeting said.

The US and France have been at loggerheads over France’s attempt to target big tech groups, most of them American, and the Trump administration is retaliating against a new French law that imposes a 3 per cent turnover tax on tech groups.

Mr Mnuchin said the US would continue the Section 301 investigation of France’s unilateral move ordered by US president Donald Trump and implemented by his trade representative Robert Lighthizer, while continuing to push for a multilateral agreement through the OECD.

“We don’t have a solution,” Mr Mnuchin said. “We’re beginning to develop a framework. We feel very strongly that this should not just be geared at the US digital companies.”

France and its European allies on the issue did not win agreement at the G7 for a specific targeting of digital companies, but officials said they were satisfied with plans to ensure that companies with no or little physical presence in a country — especially tech groups — paid fair tax there if it made money on its citizens and their data.

“It’s a real advance for fairer tax for the 21st century,” finance minister Bruno Le Maire told a news conference. “It’s the first time that members of the G7 agree on this principle.”

One senior French official added: “We don’t have a specific regime for digital companies, but the digital companies and the digital business model will be a key determinant in the right to tax and the allocation of tax.”

The official continued: “Thanks to our new rules Germany, for example, will be able to tax part of the profits made in Germany with German internet users . . . and will do it at German tax rates.” France says it will withdraw its national tax on big digital companies as soon as an international deal is decided, hopefully by the end of 2020. The UK and Spain are also preparing national taxes.

As expected, the G7 also agreed on the principle of a global minimum corporate tax rate to ensure that big multinationals did not divert their profits to tax havens or low-tax jurisdictions and deprive countries where they do their business of much-needed tax revenues.

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