Seven wealthy countries have announced a plan to impose a minimum levy on multinationals and reformulate country taxation rules, but policymakers around the world will have to make some tough decisions before anything actually changes.
The Seven Nations Group agreed on a broad framework for changing the global corporate tax system rather than a detailed plan. It pairs two related but different “pillars”.
The adoption of the proposal is associated with high political and bureaucratic hurdles. Here is a look at some of the factors that will shape any global corporate tax system.
1. An essential part of the proposal would turn a long-standing principle of international taxation on its head.
This principle stated that corporate profits should be taxed where value is generated, which has traditionally been where companies were physically present. The rule was easier to follow when the profit came from factory floors rather than patents and other highly mobile intellectual property.
Now the G-7, made up of Canada, France, Germany, Italy, Japan, the UK and the US, is proposing that some of the profits of some of the largest corporations should be reallocated to the countries where their products and services are consumed will. These countries can then tax the reallocated portion of the profit.