The ministers of the Group of Seven had a meeting in the UK before the G7 Summit and agreed on a proposal of reforming the international tax system, as reported by Financial Times on June 6. According to the proposal, it set a global minimum corporation tax rate of 15%. They also reached a consensus on allocation of tax rights by charging profitable multinational enterprises (MNEs) for extra tax payment in the region where they generate the most profit. The agreement by G7 is the first step of tax reform, while the tax plan will be finalized and take effect after approval by G20 countries and a broader group of countries.

According to OECD’s estimation, the tax reform could bring an increase of USD50bn to USD80bn in corporate income tax per year. This income could alleviate global debt pressure caused by the COVID-19 pandemic, which was USD289tr in 1Q21 reported by the Institute of International Finance (IIF). Additionally, the funds may be used to support climate policies for countries with net-zero goals.

A KPMG report argued that corporate tax performance became a critical factor in ESG integration, especially corporate income tax responsibility and disclosure targeting aggressive tax strategies. However, it was still the case that many companies chose tax havens as one of their tax strategies. A study done by Tax Justice Network showed that roughly USD427bn of tax revenue is lost to tax havens each year, where USD245bn of such loss was directly related to corporate tax abuse by MNEs. Some less developed countries also suffered from global tax abuse, amounting to around 52% of their combined public health budgets. The minimum tax rate of 15% and other requirements in the G7 tax reform could slake the edge of tax havens and stop the unhealthy ‘race-to-bottom’ tax policy. It could improve ESG incorporation in companies’ tax performance and ensure economic fairness especially in poorer areas and tax havens.

Sources:

https://www.ft.com/content/95dd0c00-7081-4890-bcef-b9642312db4d

https://www.iif.com/Research/Capital-Flows-and-Debt/Global-Debt-Monitor

https://www.bloomberg.com/news/articles/2021-06-08/the-g-7-deal-to-tax-corporations-more-is-good-climate-policy?sref=P6xXtEaF

https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/03/corporate-tax-a-critical-part-of-esg.pdf

https://taxjustice.net/2020/11/20/427bn-lost-to-tax-havens-every-year-landmark-study-reveals-countries-losses-and-worst-offenders/