G-7 Nations Agree on New Rules for Taxing Global Companies

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The Group of Seven leading rich countries agreed to back new rules for taxing businesses that operate internationally in a significant step toward a global agreement that would deliver the 15% floor that the Biden administration said it could accept.

The agreement, reached by treasury chiefs during a meeting in London on Saturday, resolves some of the long-running tensions between the U.S. and large European economies that have at times threatened to push the international tax system into chaos and spark a trans-Atlantic trade conflict.

Under the deal, G-7 members will back a global minimum tax rate on company profits and a new way of sharing the revenues from taxing the world’s largest and most profitable companies.

The G-7, which comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S., agreed that businesses should pay a minimum tax rate of at least 15% in each of the countries in which they operate.

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“The G-7 finance ministers have made a significant, unprecedented commitment today that provides tremendous momentum towards achieving a robust global minimum tax at a rate of at least 15%,” said Treasury Secretary

Janet Yellen.

There are still significant details to be worked out, and the deal isn’t sufficient to see the new rules applied globally. For that to happen, it would need support from the Group of 20 leading economies—which includes China and India, among other developing economies—as well as the backing of the 135 countries that have been negotiating the new rules as part of what is known as the Inclusive Framework. Treasury chiefs from the G-20 are due to meet in Venice on July 9-10.

The U.S., which already has a form of minimum tax on companies based in the country, wants to make that levy tougher and raise domestic tax rates to pay for the Biden administration’s new programs. Doing so unilaterally would increase the cost of having a U.S. headquarters, but if other countries imposed similar taxes on their companies, the benefits of escaping the U.S. would shrink. To prod other countries toward a deal, the U.S. has proposed denying certain tax deductions to the U.S. operations of companies based in countries that don’t impose minimum taxes.

The main aim of European countries has been to increase taxes on large digital businesses such as Google’s

Alphabet Inc.

and

Facebook Inc.,

most of which are based in the U.S. To do that, an overhaul of the existing rules is needed, because they were designed for an age in which businesses had to have a large physical presence in a country—such as a factory—to be able to make profits there.

A group photo of the attendees of the G-7 meeting at Lancaster House in London on Saturday.



Photo:

henry nicholls/Reuters

“Just because their business is online doesn’t mean they should not pay taxes in the countries where they operate and from which their profit derives,” the treasury chiefs of France, Germany, Italy and Spain said in a joint statement Friday. “Physical presence has been the historical basis of our taxation system. This basis has to evolve with our economies gradually shifting online.”

A number of European countries raised the stakes in the long-running talks by announcing separate, national levies on digital businesses, hoping that would pressure the U.S. to agree to an international deal. In retaliation for what it saw as discrimination against U.S. companies, the U.S. government announced a series of punitive tariffs on imports from those countries, although it suspended those tariffs until the end of this year.

The G-7 agreement brings a possible increase in tax bills for a number of digital businesses a step closer. The alternative to an agreement was likely to be an overlapping series of national levies that could have seen the same profit taxed multiple times in different locations, an outcome digital businesses were keen to avoid.

Large tech companies have long expressed support for an international resolution on how to divvy up their taxes among countries. Executives at the companies argue that they need certainty in tax rules, rather than a patchwork of national taxes like those passed in some European countries—and some privately accept that a global deal may mean an increase in their tax bills.

“A multilateral solution will help bring stability to the international tax system,” an

Amazon.com Inc.

spokesman said Saturday, adding, “The agreement by the G-7 marks a welcome step forward in the effort to achieve this goal.”

A spokesman for Alphabet’s Google said Saturday: “We hope countries continue to work together to ensure a balanced and durable agreement will be finalized soon.”

An

Apple Inc.

spokesman declined to comment. Facebook didn’t immediately respond to a request for comment.

The toughest question in the tax talks has been the handling of the largely American cadre of tech giants. European countries wanted those companies to pay more taxes in countries where they do business. But the U.S. had rejected a deal that focused only on tech companies as both discriminatory and outdated given the increasingly digital nature of most sectors. That has been a consistent position under both the Trump and Biden administrations.

Instead, G-7 countries have agreed to focus the new tax rules on large, global businesses that have a profit margin of at least 10%. They agreed that the right to tax 20% of profits above that threshold would be shared out among governments.

That new approach, suggested by the U.S., may run into opposition in Congress, where some lawmakers are wary of moving before other countries. Some of the changes could require the U.S. Senate to ratify changes to tax treaties, which would take a two-thirds vote and thus at least some Republican support.

British Chancellor of the Exchequer Rishi Sunak at the G-7 meeting in London on June 4.



Photo:

andy rain/Shutterstock

“The rationale deviates from the original intent and appears to lack an articulated foundation in tax principles beyond populist appeal,”

Sen. Mike Crapo

(R., Idaho), the top Republican on the Finance Committee, wrote in a letter last month to Ms. Yellen.

If backed by the G-20 and the broader group of countries involved in the negotiations, the new rules would mark the most radical overhaul of international tax rules since the 1920s, when countries began to negotiate a web of thousands of tax treaties that make up the existing system.

For advocates, a minimum tax rate would end what they say is a “race to the bottom” in recent decades as countries engaged in competitive rounds of tax cuts to draw businesses away from each other.

The Biden administration has proposed raising the corporate tax rate to 28% from 21% and to raise the existing minimum tax on foreign profits of U.S.-based companies to 21% from 10.5% while tightening the rules for that tax. It’s not clear yet whether there is enough support in Congress, even among Democrats, to raise taxes that much.

Write to Paul Hannon at paul.hannon@wsj.com, Richard Rubin at richard.rubin@wsj.com and Sam Schechner at sam.schechner@wsj.com

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