A meeting of finance ministers in London agreed to avoid tax by making companies pay more in the countries where they do business.
They agreed in principle to a global minimum corporate tax rate of 15% to avoid countries undercutting each other.
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What is G7?
The Group of Seven (G7) brings together some of the world’s richest democracies – the UK, US, Canada, Japan, France, Germany, and Italy – with representatives from the European Union.
What is The Latest G-7 Tax Deal?
Three major decisions were taken in the meeting – MNCs will be forced to pay tax on foreign profits; A minimum corporate tax rate of 15 percent will be implemented globally;
And finally, countries will be able to tax the profit share on companies “that have no physical presence but substantial sales.”
“We are committed to reaching an equitable solution on the allocation of tax rights, with market countries providing tax rights on at least 20 percent of profits exceeding a 10% margin for the largest and most profitable multinational enterprises.
We will provide appropriate coordination between the implementation of the new international tax rules and the removal of all digital services taxes on all companies, and other relevant similar measures.
We aim for a global minimum tax of at least 15 percent on a country-by-country basis We agree on the importance of progressing the agreement in parallel on both pillars,
And look forward to reaching an agreement at the July meeting of G20 finance ministers and central bank governors,” G7 finance ministers and central banks Governors said in a release.
How the G-7 Tax Deal Works?
Governments can still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their domestic governments can “top-up” their taxes to the lowest rate.
Thereby eliminating the benefit of transferring profits. The OECD said last month that governments broadly agreed on the basic design of the minimum tax, but not on the rate.
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Tax experts say this is the toughest issue, although the G7 agreement generates strong momentum around the level of over 15 percent.
Other items still to be negotiated are whether investment funds and real estate investment trusts should be covered when the new rate is to be implemented and whether it is compatible with US tax reforms aimed at curbing erosion.
What is Tax Avoidance & How it works?
Tax avoidance is the act of using legal methods to reduce tax liability. In other words, it is an act of using the tax regime in the same area to reduce one’s tax burden for one’s personal benefit.
Although tax avoidance is a legal method, it is not advisable as it can be used to one’s own advantage to reduce the amount of tax payable.
Tax avoidance is an activity to take undue advantage of loopholes in tax rules by finding new ways to avoid payment of taxes within the limits of the law.
Tax avoidance can be achieved by adjusting the accounts in such a way that the tax rules will not be violated. Tax evasion is valid but in some cases it can amount to a crime.
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The international business taxation system that emerged in the early 20th century stipulated that active business income would be taxed at the location where the business is located.
But it had an inherent drawback, as a large proportion of global trade takes place in the form of inter-firm trade between subsidiaries within the same company.
Companies often transfer large portions of profitable activities to subsidiaries in low-tax jurisdictions, aka tax havens, so that the income appears to have been derived from there. As a result, they are taxed at a very low level.