Major G7 tax agreement only first step toward global deal: Freeland

Finance Minister Chrystia Freelandsaid Saturday an agreement made by Group of Seven (G7) countries on taxing multinational companies and setting a global minimum corporate tax rate was just a first step toward a global deal.

She also said the Liberal government stillintendsto go ahead with athree per cent digital services tax announced in last month's federal budget that is set to come into effect next year, contingent on any international deals.

The first "pillar" of the agreement announced Saturday would give countries in which major multinationals do business taxation rights to at least 20 per cent of any profit above a 10 per cent margin. The second pillar involves setting a global tax floor of 15 per cent for corporations, implemented on a country-by-country basis.

"Multinational companies need to pay their fair share of taxes. Jurisdiction shopping allows them to avoid doing that," Freeland said in a call with reporters on Saturday, referring to business and accounting practices thatshift profits to low-tax countries.

Key questions remain, especially which multinational companies will be captured by the new rules in the first pillarand how the new taxed profits will be distributed among affected countries.

Digital services tax still planned

Freeland told reporters that the government still intendsto go forward with the digital services tax it announced in April. At the time, it was framed as a step forward while multilateral agreements were being negotiated, and Freeland said she hoped the domestic and international policies could "dovetail."

The communiqu agreed to by the G7 finance ministers noted that work would need to be done to reconcile existing domestic digital taxation measures and future international agreements.

"We will provide for appropriate co-ordination between the application of the new international tax rules and the removal of all digital services taxes, and other relevant similar measures, on all companies," the communiqu reads.

U.S. Treasury Secretary Janet Yellen said European countries would scrap existing digital services taxes thatthe United States says discriminate against U.S. businesses as the new global rules go into effect.

Asked Saturday if the new rules would cover major U.S. tech giants, Yellen said the new regime "will include large profitable firms, and I believe those firms will qualify by almost any definition."

'This is not something we can do on our own'

Freeland was careful to frame the Saturday announcement as an "agreement" or "position" rather than a deal, explaining it was a first significant step toward a global compact.

The G7 position will now need to be brought to a meeting of G20 countriesnext month, followed byan ongoing dialogue led by theOrganization for Economic Co-operation and Development (OECD) involving more than 125 countries.

"Canada recognizes and I believe all of my G7 partners recognize as well that this is not something we can do on our own. We wouldn't dream of that," Freeland said.

But the finance minister did not specify whether or how the G7 position might change when it was presented to a wider international audience.

"The communiqu that was issued by the G7 today very much reflects all of Canada's positions," she said, emphasizing that the changes to a minimum tax and to the tax base needed to work together.

Even before the deal was made, it faced political opposition in Canada. Conservative Party Leader Erin O'Toole criticized the prospect of a major multilateral tax deal that would set a minimum rate for corporations in a letter dated June 4 and addressed to Prime Minister Justin Trudeau.

"I implore you to reject this new tax proposal during your G7 leaders meeting and unequivocally state to G7 Leaders that Canadians, and Canadians alone, determine our nation's domestic tax policy and rates," O'Toole wrote in the letter.

Freeland's ministerial counterpart in Ireland, which has a corporate tax rate of 12.5 per cent, emphasized that the conversation would need to continue beyond the G7 to the ongoing dialogue hosted by the Organization for Economic Co-operation and Development and the G20.

"There are 139 countries at the table, and any agreement will have to meet the needs of small and large countries, developed and developing," Paschal Donohoesaid.

'Important work left to do,' OECD secretary general says

Allison Christians, a tax law professor at McGill University, said the G7 deal was not in the spirit of a years-long process spearheaded by the OECD, known as the Inclusive Framework.

"The last 10 years have been about building a more inclusive body where it's supposed to matter what other countries think," she said Saturday. "What's historic is the seven richest nations in the world dictating what the tax system is going to look like for all the rest.

But Christians said that even though the process was "unfair," it in itself would likely not scupper a global deal. "The world we actually live in is the one where the G7 controls these rules," she said.

Mathias Cormann, who was sworn in as the OECD's new secretary general last week, said the G7 announcement was a "landmark step" towardtax reform but there was "important work left to do."

David Duff, professor of law and director of the tax program at the University of British Columbia's law school, disagreed that it was matter of the G7 imposing rules on the rest of the world.

"I think it's just a stage in the entire process, I don't think they pre-empted it. All they've said is they're on board with it and obviously to make it happen it's got to be a broader group," he said.

Duff said it's unlikely that there would be major changes to the structure of the "pillars" referenced in the agreement during subsequent talks with a broader international group. Buthe noted there may be some negotiation over the details, including which companies are covered.

Duff also said beyond the challenge of getting the rest of the world signing on, there's the question of corresponding domestic law. "How it's going to operate, to translate it all into domestic legislation will be a challenge," he said.

Major companies react

Google said onSaturday that it "strongly supports" the work being done to updateinternational tax rules.

"We hope countries continue to work together to ensure a balanced and durable agreement will befinalized soon," Google spokesperson Jose Castanedasaid in anemailed statement.

Facebook said it expects it will have to pay more tax in more countries as a result of the agreement.

"We want the international tax reform process to succeed and recognize this could mean Facebook paying more tax, and in different places," said Facebook vice-president for global affairs Nick Clegg.