G20 takes a step towards corporate tax increase

Finance ministers from the G20 group have agreed to set a floor on corporate tax rates. They have also decided that multinational firms will be taxed by countries where they operate as opposed to where they are headquartered, meaning they might end up paying more taxes to foreign countries.

The Wall Street Journal reported on Wednesday that finance ministers from the Group of 20 leading economies came to the conclusion after a conference call where they discussed taxation on international businesses. Italian Finance Minister Daniele Franco, who chaired the meeting, said that U.S. Treasury Secretary Janet Yellen had stressed the need for a minimum rate and that her proposal was consistent with the G-20’s ambitions, adding that “What we see this year is an acceleration in the process, and the G-20 is expecting to reach an agreement in July.” Yellen suggested putting an end to the worldwide race to the bottom in taxation by setting a 21 percent minimum corporate tax rate, an idea that was welcomed by Germany and France and is endorsed by the International Monetary Fund (IMF).

The international consensus on “increasing taxes” comes as government spending is soaring amid the COVID-19 crisis. Statistics released by the IMF show that globally governments have committed approximately 16 trillion dollars to fighting the pandemic and its economic fallout, while the government debt-to-global GDP ratio went up from 84 percent in 2019 to 97 percent in 2020 and is expected to reach 99 percent this year.

“The response of fiscal policy was unprecedented in speed and size,” said Vitor Gaspar, the director of the Fiscal Affairs Department of the IMF, urging countries to adopt medium-term strategies to “deal with the risks associated with historically high public debt levels.”

Speaking of the minimum corporate tax, the Ministry of Economy and Finance said it was to prevent profit-shifting to low-tax jurisdictions and every nation will work towards a July deadline.

On the same day, G20 also discussed how taxes will be levied on multinational companies. They reached an agreement that a country where businesses have their customers, instead of where their headquarters are located, should collect taxes. Once implemented, this measure would allow foreign countries to raise more taxes from international companies than those where they are headquartered.


Choong-Hyun Song balgun@donga.com