At a meeting in London on June 5， finance ministers of the Group of Seven （G7） nations agreed to establish a global minimum tax rate of 15 percent for large multinational companies. The historic agreement demonstrates the growing willingness of the United States and European countries to cooperate in the context of rising populism， protectionism and deglobalization in the Western world. It is expected to bring profound changes to global tax governance， as well as to the global trade and economic landscape.

Contributing factors

　　International tax has long been a complicated issue. As early as the beginning of the 20th century， the double taxation of enterprises by multiple tax jurisdictions hindered the global free flow of goods and capital. Therefore， in order to address the multiple taxation issues and the allocation of taxing rights， an international tax rule system based on the Model Tax Convention on Income and on Capital of the Organization of Economic Cooperation and Development（OECD） was established under the dominance of the U.S. and European countries.
　　However， as economic globalization has progressed， the opportunities have increased for multinational companies to exploit legal discrepancies in different jurisdictions in order to avoid tax. This has led not only to unfair competition， but also to a loss in tax revenue for governments.
　　Since 2008， a new round of international tax governance reform was initiated by European countries. Between 2013 and 2015， the Group of 20 （G20） led the adoption of new tax rules based on the OECD’s Base Erosion and Profit Shifting initiative in order to address problems of multiple non-taxation and tax evasion， and to promote fair competition. Many countries have also worked together to increase policy coordination， promote the unification of their tax systems， and stop attracting international investment through tax “wars.”
　　This new agreement between G7 nations on the global minimum corporate tax rate was made through multiple rounds of negotiation and compromise， after the U.S. proposal of 21 percent was rejected by the European EU members. Moreover， they have committed to coordinating their positions on digital service tax and promoting reform of international tax governance.
　　Against the background of international tax governance reform， domestic economic concerns and major-country competition were also at play in the forming of consensus within the G7.
　　G7 nations now bear heavy debts and financial burdens. In order to stimulate post-pandemic economic recovery， they urgently need tax system reforms to help reverse their fiscal imbalance and improve domestic business environment. Countries with lower corporate tax rates are seen as major obstacles to realize their goals. 　　In addition， the U.S. made concessions on the minimum tax rate as a signal of its return to multilateralism， hoping it would help draw its allies into joint efforts to contain China. The Joe Biden administration emphasizes that diplomacy serves internal affairs， and the promotion of international tax governance reform is consistent with its “middle class” diplomacy， conducive to consolidating its constituency.

A new era

　　The reshaping of international taxation rules requires the effort of all countries through consultation and cooperation. G7 countries’agreement on the minimum corporate tax rate is a major event in the process. Although it still faces uncertainty and carries obvious geopolitical implications， it is still likely to be implemented and promoted globally for a number of reasons.
　　First， major economies， including the U.S.， Japan and major European countries， possess relatively strong political incentives to promote the minimum corporate tax rate. This plan could bring along tangible benefits as it can not only increase tax revenues and ease financial burdens of these countries， but also help promote the return of their industries from offshore， which will in turn ease domestic discontent.
　　Second， setting a minimum corporate tax rate falls in line with the global trend. According to OECD statistics， governments lose up to $240 billion in tax revenue every year due to tax evasion and avoidance by multinational companies. The tax “wars”between countries have exacerbated the problem. Since 2016， the G20 and related international organizations have held several rounds of negotiations in order to promote international tax governance reform. Currently， they have reached consensus on a two-pillar solution.
　　On the one hand， building a system of new international taxation rules and promoting the formation of an international unified approach， which can be used as a basic framework to solve the problem of global taxing rights allocation. On the other hand， setting the global floor to gradually raise the minimum corporate tax rate in regions where it’s below 15 percent， and addressing tax avoidance by multinational enterprises. The G7 countries’ agreement is consistent with the efforts of the G20， and therefore likely to be supported by the latter.

Obstacles ahead

　　Nevertheless， the implementation of the new minimum tax rate is expected to be full of challenges， which have already emerged in some quarters. 　　First， resistance has come from countries with lower tax rates， especially tax havens such as Ireland. Ireland’s current effective corporate tax rate is only 12.5 percent. The Irish Government has previously stated that it hopes to maintain this tax rate in order to continue to attract foreign investment.
　　Second， internal opposition from G7 countries. The purpose of international tax governance reform is to prevent tax evasion and tax avoidance by multinational corporations. As home to many of such companies， interest groups in the U.S. are bound to intensify their lobbying efforts to obstruct the passing of the agreement in Congress. Moreover， the bipartisan divide in the U.S. is strong， and the forces that support “America First”policies are on the rise. It is expected that the Biden administration will face huge waves of opposition， not only on this issue but on many others. In particular， the amendment of tax treaties requires a two thirds majority of the U.S. Senate. The Biden administration has a long way to go before passing any legislation facilitating the implementation of the G7 agreement， as the Democrats hold only 50 Senate seats.
　　Third， the agreement is still a long way from its final global implementation. The proposal of the minimum corporate tax rate is only the first step in the reshaping of global tax governance systems， and more specific details have yet to be released. For example， the identification of the subjects of taxation， the alignment of new tax rules and other reform measures， and differential treatments for developing countries. Even if G20 members and most other economies reach consensus on such issues and details are formulated， individual countries may still choose to accept or not accept them on a voluntary basis due to a lack of mandatory implementation and supervision mechanisms.
　　The setting of the global minimum corporate tax rate may have an impact on some Chinese enterprises in the short term. For example， some Chinese companies， like large multinationals， allocate their capital globally in order to avoid taxes and maximize profit. Their tax burden will increase as a result of the reform. In addition， the taxation policies of some free trade zones and ports in China might be adjusted accordingly.
　　In the long run， the promotion of global tax co-governance is in line with China’s long-term interests. Therefore， China should actively participate in the negotiation of new tax rules with an open attitude and play its part within the G20 framework. BR