The agreement of the G7 to the dual principle of, on the one hand, a global minimum rate of corporate income tax and, on the other, the right of countries to tax the most profitable multinationals where their profit is generated, not headquartered, has divided opinion on the centre right. 

While the government has heralded the agreement as a “huge prize for British taxpayers” that will “level the playing field”, there are some who argue that the agreement represents a loss of sovereignty and a rejection of competition. As this argument runs, the UK should be using its Brexit freedoms to become much more competitive to international business, rather than joining a rich country “cartel”. In essence, we should be emulating Singapore, not acquiescing to become more like Germany. 

The first problem with this argument is that the UK is only rejecting competition if it intends to reduce corporation taxes below the minimum effective tax level of 15 per cent. The Chancellor has just announced plans to increase the headline rate to 25 per cent in 2023 to fill the coronavirus-shaped black hole in the public finances. Foregoing those planned rises and reducing the current headline rate to 15 per cent would create a fiscal gap of around £30 billion by 2025-26. Hard to defend when many corporates have generated bumper profits, at least in part because of the extraordinary economic underwriting by finance ministries during the pandemic, and ministers cannot move for noisy demands to funding on kids’ catch-up, net zero and universal credit. 

The second problem is that the deal does not envisage a “cartel” in any meaningful sense. It does not mean, for example, that every country will set a 15 per cent or higher effective rate, only that multinational profits would be subject to a 15 per cent minimum, even if they choose to book profits in a lower tax jurisdiction. So the US Treasury would be able to levy an additional 10 per cent corporate income tax on multinational profits booked in Ireland, where the effective rate is 5 per cent. This suggests no loss of sovereignty, only a much reduced (and market-based) incentive to undercut the minimum given multinationals would be taxed at 15 per cent anyway. 

The third problem is that the deal should, in theory at least, make markets more efficient, not less. The last 40 years has seen a growing tendency for large companies to register profits in low tax jurisdictions and to structure their finances in highly complex and opaque ways. This has created a global industry in tax planning, profit shifting and avoidance that serves little economic purpose other than to reduce liabilities. The OECD, World Bank, and IMF have all warned of the distortive effects of profit shifting and base erosion, on rich and poor countries alike. Complexity and bureaucracy are the enemy of effective markets, after all. 

It is for these reasons, as well as the growing public indignation over the taxes paid by digital giants, that successive Conservative chancellors have embraced multilateral diplomacy in their efforts to secure a sustainable corporate tax base. After a decade of glacial progress, Rishi Sunak’s success within six months of a new US administration should be warmly welcomed.