The agreement on corporate taxes reached over the weekend by the finance ministers of the Group of Seven industrialised countries could potentially have profound implications for the tax strategies of companies and governments alike. The agreement, which is intended to discourage large multinational enterprises (MNEs) from shifting profits to low-tax jurisdictions and ensuring greater fairness in the tax liabilities that they have to bear, proposes two key changes. First, that taxes on companies' profits should be based on where their customers are, not on where they are headquartered or choose to book their profits; and second that companies be subject to a global minimum effective tax rate of at least 15 per cent. If they pay less than that in a certain jurisdiction, they would need to top up tax payments to their home countries to reach the 15 per cent threshold.
Such rules would especially benefit economies such as the United States and the European Union where MNEs have large numbers of customers and revenues and where many are headquartered. They would be disadvantageous to economies such as Ireland, Hong Kong, Singapore and Switzerland where MNEs have relatively smaller customer bases, and which use low taxes as part of their strategies to attract foreign investments. The new rules could take many months, if not years, to be finalised. They have to be discussed by the Group of 20, which will meet next month, as well as by the 139 members of the Organisation for Economic Cooperation and Development (OECD). They will also need to be approved by legislative bodies. Several issues will need to be ironed out, including which types of MNEs will be covered by the new rules, how effective tax rates - what companies actually pay - will be determined and made comparable and the final level of the minimum tax itself.