The Group of Seven (G7) industrialized nations have agreed on new rules for taxing multinational businesses, paving the way for a global tax accord that aims to address the challenges arising from globalization and the digitalization. This came after a meeting of finance ministers of the G7, a club of rich nations comprising Canada, France, Germany, Italy, Japan, the U.K. and the U.S.
The rules will apply to large, global businesses that have a profit margin of at least 10%. A statement indicated that the right to tax 20% of profits exceeding that threshold would be reallocated and subject to tax in the jurisdictions where sales are made. In addition, there is also a commitment to a minimum global corporate tax rate of at least 15%.
The growing trend towards digitisation and multinational businesses – in particular tech giants – has lead to concerns that such companies have been able get away with paying less than their “fair share” of taxes, because of their ability to provide cross-border goods and services without a physical presence in the markets they sell to.
International discussions on addressing digital business activity and offshore tax evasion began in 2013. The new rules will reduce the incentive for large businesses to shift their profits away to tax havens or low tax locations from the jurisdictions where they operate, as there would no longer be tax discrepancies to take advantage of.
At first glance, such a global minimum tax could impact Hong Kong’s attractiveness as place for regional headquarters, given its headline tax rate of 16.5%. However, Hong Kong’s effective tax rate may well be less than 15% currently, thanks to the various tax breaks and incentives that are available.
On the other hand, the ability to collect the difference between the effective tax rate and the global minimum would mean more revenue for government coffers.
Details of this potential global agreement are expected to be ironed out when the G20 finance ministers meet in Venice on 9-10 July.
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