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RACHEL MARTIN, HOST:
Global multinationals have long been criticized for failing to pay their fair share of taxes. The finance chiefs of the seven largest economies in the world agreed on a deal over the weekend that should change that. The agreement provides for a global minimum tax rate of 15%. Businesses would pay this amount regardless of where their headquarters are located. What impact could this have on the global economy? We talk about this with David Wessel, the director of the Hutchins Center at the Brookings Institution and regularly on our program. David, nice to talk to you.
DAVID WESSEL: Good morning.
MARTIN: So explain why this agreement is such a big deal.
WESSEL: Well, a big issue is that multinational corporations are global, but taxes are national. And many large companies have learned to use the variety of national tax systems to lower their tax bills. The Biden administration wants to raise the corporate tax rate. Actually, the British too. But raising corporate tax rates is really difficult when other countries have much lower rates and big corporations are so adept at posting their profits in the low-tax countries. To curb this competition, the G7, Group of Seven, has said that every country should have a minimum tax rate of at least 15%, and they have developed what is known as an underpayment mechanism to steal the countries that are not – that Don go not with. That is what Treasury Secretary Janet Yellen put it in London over the weekend.
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JANET YELLEN: There has been a global race to the bottom in corporate taxes for too long, with countries competing by lowering their tax rates rather than ensuring the well-being of their citizens and the natural environment. The G7 took significant steps this weekend to end the existing damaging dynamic.
MARTIN: So talk more, David, about what Yellen calls the existing harmful dynamic. I mean, how is this new agreement different from what’s happening now?
WESSEL: Well, the second big problem is that companies like Facebook, Google, Amazon and Apple can earn a lot of money in a country without having a lot of physical presence there. And the system of dividing profits between countries, which dates back to the 1920s, has collapsed. France, the UK, Italy and other countries have imposed what is known as a digital services tax on these major digital technology giants, all of which are based in the US. The Obama, Trump and Biden governments have all fought against it. The G7 deal outlines an alternative, a formula to tax the 100 or 150 most profitable large global corporations, not just these US tech companies, and then find a way to distribute the revenue among all the countries in the world where they are located Businesses are businesses.
MARTIN: So you made this agreement. When can I trade? What needs to happen before the US and other governments collect more taxes from these companies?
WESSEL: Good question. There is a lot to be done. First, there are all sorts of unresolved details. And when it comes to taxes, in particular, it comes down to details like how much you can deduct before that minimum tax is due? And while the G7 is a big chunk of the world economy, of course it’s only a chunk. So the next step is to get a larger group of countries called the G20, including China and India, to participate. Your finance ministers will meet in Venice in July. But the big hurdle could be the US Congress, which would have to approve any change in US tax law and new tax treaties. Still, the fact that the G7 reached an agreement is a significant step in jointly tackling a problem that has really annoyed global governments for a really long time and has reduced their tax revenues.
MARTIN: All right. David Wessel is the director of the Hutchins Center at the Brookings Institution. David thank you. We appreciate it.
WESSEL: You’re welcome. Transcript provided by NPR, Copyright NPR.