The G7 group of advanced economies has reached a “historic” deal to make multinational companies pay more tax.
Finance ministers meeting in London agreed to battle tax avoidance by making companies pay more in the countries where they do business.
They also agreed in principle to a global minimum corporate tax rate of 15% to avoid countries undercutting each other.
Tech giants such as Amazon and Google could be among those affected.
The deal announced on Saturday, between the US, the UK, France, Germany, Canada, Italy and Japan, plus the EU, could see billions of dollars flow to governments to pay off debts incurred during the Covid crisis.
Negotiated over many years, it will put pressure on other countries to follow suit, including at a meeting of the G20 next month, which includes China, Russia and Brazil.
US Treasury Secretary Janet Yellen told reporters that the “historic” agreement on a global minimum tax would “end the race to the bottom in corporate taxation and ensure fairness for the middle class and working people in the US around the world”.
UK Chancellor of the Exchequer Rishi Sunak, who hosted the summit, said the agreement would make the global tax system “fit for the global digital age”.
His German counterpart, Olaf Scholz, said it was “very good news for tax justice and solidarity and bad news for tax havens”.
“Companies will no longer be in a position to dodge their tax obligations by booking their profits in lowest-tax countries,” he said.
Why did they want to change the rules?
Governments have long grappled with the challenge of taxing global companies operating across many countries.
That challenge has grown with the boom in huge tech corporations like Amazon and Facebook.
At the moment companies can set up local branches in countries that have relatively low corporate tax rates and declare profits there.
That means they only pay the local rate of tax, even if the profits mainly come from sales made elsewhere. This is legal and commonly done.
The deal aims to stop this from happening in two ways.
Firstly the G7 will aim to make companies pay more tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits.
Secondly, they want a global minimum tax rate so as to avoid countries undercutting each other with low tax rates.
