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G7 finance ministers reach global minimum corporate tax deal

G7 finance ministers have reached a global minimum corporate tax deal. EY Global Vice Chair of Tax Kate Barton joins Yahoo Finance Live to discuss.

Video Transcript

AKIKO FUJITA: For some more analysis on this, let's bring in our first guest for the hour. We've got Kate Barton, EY global vice chair of tax. Kate, it's good to talk to you today. When you think back to Treasury Secretary Janet Yellen initially sort of putting this idea on the table, she discussed this in the context of ending the race to the bottom, as she described it. If we're talking about a 15% floor here on corporate taxes, to what extent does that resolve the issue?

KATE BARTON: Well, it's definitely a big step. I mean, there are a lot of countries around the world that will have to increase their tax rate if this, in fact, goes forward. The devil is going to be in the detail because do you just look at the federal tax rate, or do you look at the state or the state equivalent in countries around the world, like cantons and the like?

But there are a number of countries, for example Ireland, which has got a 12 and 1/2 percent rate, which has been a longtime part of the tax policy, where they've taxed corporations at a lower rate and then have really taxed their wage-earners at a higher rate. And that's always been something that they felt like has fueled their economy.

So countries have competed, really, on their headline rate. And so this will change that game.

ZACK GUZMAN: I mean, when it comes to that, obviously, some countries have even used it to their advantage, as you're describing there. So how does it maybe benefit some? What are the ones that stand to benefit the most here or lose the most if this is to kind of become the way things are done?

KATE BARTON: Well, this is just the start. The global minimum rate is important. But then it's all how the country, the headquarters countries taxes. And so in the US, we have worldwide taxation still. And it is important for that global minimum tax to sort of fit together, if you will, through foreign tax credits and the normal corporate rate.

And so how that all comes together, that's the kind of details that we need, as each country looks to adopt what the G7 and ultimately the G20 come out with this summer and this fall. So hopefully, I think most companies right now are just looking for this process to get more certain. And if it's going to happen, then they're all looking to try to model this and to make sure that they understand what does it mean for their exact scenario.

I think most companies understand that taxes are likely to go up. But what they can't abide by is if the same level of profit is taxed twice. And that's where it gets really dicey. And how this fits with the country's domestic tax code matters. And so it's tremendously complicated.

AKIKO FUJITA: Kate, let's talk specifically about how this is likely to affect some of the big tech names because as Jessica Smith just pointed to, part of the agreement here was to end the digital services tax but then still tax 20% of profits if companies have 10% of margins.

We heard from Facebook's VP of global affairs, Nick Clegg, who responded to the agreement over the weekend. I want to point to that tweet there and get your response because he said Facebook has long called for reform of global tax rules. We welcome the important progress made at the G7. He then went on to say, today's agreement is a significant first step towards, certainty, for businesses strengthening public confidence in the global tax system. We want the international tax reform process to succeed and recognize this could mean Facebook paying more tax and in different places.

So on that last part, Kate, how much higher are these new rules, if they do, in fact go through, the G20 countries also get on board, how much higher are those taxes likely to be, especially for these big tech names who operate in multiple countries?

KATE BARTON: Well, I think, certainly, this weekend news has been a big endorsement for what's been going on for a while at the OECD and what we call pillar one, pillar two. And that's what, really, the communique addresses and is strongly endorsing.

So it really varies by industry and a company's specific fact pattern. But we've had some companies model this out tentatively. And it could be anywhere from an 8% to 10% increase in their tax rates. But it really is company-specific and depends on where they're manufacturing, distributing, and where their intangibles are. So difficult to pinpoint exactly, but you can bet everybody is modeling this out and communicating with their C-suite and their shareholders so that it's well understood, at least as much as we know right now.

AKIKO FUJITA: And Kate, we started the conversation by saying that the devil really is in the details. But we've got President Biden already calling for raising corporate taxes from 21% to 28%. If this 15% floor stays in place, to what extent does that floor make it easier? Does it need to move a little higher in order for the administration to say, look, even if we raise the taxes, it's not necessarily going to hinder our competitive advantage?

KATE BARTON: Well, part of the Biden proposals has the global minimum tax in the US, which is at currently, when you cut through all the math, roughly 13%. It has it moving to 21%. So we would be above the minimum tax that the G7 is proposing.

And so much of this hinges too on foreign tax credits. What does each country do as a result? And so part of the Biden proposals too is no longer being allowed to mix your foreign tax credits. It's country-by-country. So this could end up costing the US multinationals just a lot more. And so, as you can imagine, like I said, companies are modeling this out and getting their voice heard in Washington, DC so that their interests are well represented.

AKIKO FUJITA: EY global vice chair of tax, Kate Burton. It's good to get your analysis today. Really appreciate the time.