RACHEL MARTIN, HOST:
Global multinational corporations have long been criticized for not paying their fair share in taxes. The finance heads of the world's seven biggest economies came to a deal over the weekend that aims to change that. The agreement seeks to establish a global minimum tax rate of 15%. Companies would pay this amount no matter where their headquarters were located. So what impact could this have on global economies? We're going to talk about this with David Wessel, director of the Hutchins Center at the Brookings Institution and a regular on our program. David, nice to talk with you.
DAVID WESSEL: Good morning.
MARTIN: So explain why this agreement is such a big deal.
WESSEL: Well, one big issue is that multinational corporations are global, but taxes are national. And many big companies have learned how to use the variety of national tax systems to cut their tax bills. So the Biden administration wants to raise the corporate tax rate. Actually, so do the British. But raising corporate tax rates is really hard when other countries have much lower rates, and big companies are so skillful at maneuvering to book their profits in the low-tax countries. So to restrain that competition, the G7, the Group of Seven, said that every country should have a minimum tax rate of at least 15%, and they've devised something called an underpayment mechanism to nick the countries that are not - that Don't go along with that. Here's how Janet Yellen, the Treasury secretary, put it over the weekend in London.
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JANET YELLEN: For too long, there has been a global race to the bottom in corporate taxes, where countries compete by lowering their tax rates instead of the well-being of their citizens and natural environments. The G7 has taken significant steps this weekend to end the existing harmful dynamic.
MARTIN: So talk more, David, about that, what Yellen calls the existing harmful dynamic. I mean, how does this new agreement differ from what's happening now?
WESSEL: Well, the second big problem that they have is that companies like Facebook, Google, Amazon and Apple can make lots of money in a country without having much physical presence there. And the system for allocating profits among countries, which dates to the 1920s, has broken down. France, the U.K., Italy and other countries have imposed what they call a digital services tax on these big digital tech giants, all of which are U.S.-based. So the Obama, the Trump and the Biden administrations all have fought this. The G7 deal outlines an alternative, a formula for taxing the 100 or 150 most profitable big global companies, importantly, not just these U.S. tech firms, and then finding a way to spread the revenue around all the countries of the world where these companies do business.
MARTIN: So they've come up with this agreement. When can it be acted upon? What has to happen before the U.S. and other governments start collecting more taxes from these corporations?
WESSEL: Good question. There's a lot to do. First, there are all sorts of unresolved details. And in taxes in particular, details matter, like, how much do you get to deduct before this minimum tax applies? And, of course, although the G7 is a big slice of the world economy, it's only one slice. So the next step is to get a larger group of countries called the G20, which includes China and India, to go along. Their finance ministers are meeting in Venice in July. But the big hurdle may be the U.S. Congress, which would have to approve any changes in U.S. tax law and approve any new tax treaties. Still, the fact that the G7 got an agreement is a significant step towards addressing a problem collectively that has vexed global governments for a really long time and cut into their tax revenues.
MARTIN: All right. David Wessel is the director of the Hutchins Center at the Brookings Institution. David, thank you. We appreciate it.
WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.