Could this be the most successful G7 ever?

Like any meeting of the G7, the ‘club’ of the richest industrialised economies, the one that starts this week comes with a long agenda of tough problems. There is climate change (with the aim of easing the path to the COP summit in November), economic recovery from coronavirus, and a possible deal on sharing vaccines with poorer countries.

Partly in search of tax revenues to pay for all this, governments have also made sudden progress with a proposal that for years seemed a non-starter and may now be the centrepiece of the summit. The plan has two ‘pillars’:  a global minimum corporation tax, and an agreement on taxing multinational companies, particularly digital giants, in the country where they make their sales.

The burden of the second tax will fall mainly on US companies – particularly the tech behemoths – and so the change in the US’s position, under the Biden administration, has been crucial. On the first pillar, the US has moved from its initial suggestion of a minimum 21% corporation tax rate to around 15%, according to reports. Some European Union countries including Ireland and Hungary, which have relied on even lower corporate tax rates to attract companies, are still unhappy with this. But they recognise, if nothing else, the potential political backlash of seeming to oppose something that has such public support.

A digital tax deal would rank as one of the biggest G7 successes

Critics of the proposal point out that for all its popularity as a tax, corporation tax in the end is paid by customers, employees or shareholders of those companies, including pension funds.

For that reason, the second pillar is potentially more significant. Digital giants have been able to escape corporation tax almost entirely by careful selection of location of headquarters – often in tax havens such as the Cayman Islands – and where they choose to declare 'profits', something that has been easy to manipulate legally by allocating costs in their accounts to their operations in higher-tax countries. They have also conspicuously flourished in the coronavirus era as many governments forced their people to stay home, ordering everything from food to entertainment to their door. This proposal reflects a real anger among governments and the public that these companies escape much tax and therefore are set to make little contribution to the huge costs of the pandemic.

There are many details still to be worked out and the effect could be more slight than excitement suggests. For example, Ireland could put the headline rate up to 15% but add in a lot of reliefs or exemptions that meant the effective rate remained lower. Nor does it go as far as many would like. However, if achieved, the deal will represent a big shift in attitude by G7 governments. It would also represent one of the biggest successes of the G7 in agreeing a common front on a controversial but potentially hugely useful measure for governments in search of revenue. For all the criticism of the G7, it has a raft of successes in its history including the creation of a fund for Aids and malaria. Arguably its greatest was its creation of a new lending facility after the 2008 financial crisis and its wider response to that emergency, given the scale and speed of the need for action. But this proposal would rank highly, too.

The risk is that the tax deal helps richer countries more than poorer ones

This is not a done deal, however. If the G7 agrees the proposal, it will pass to the G20 later this year, a much bigger gathering with even more room for controversy. Some poorer countries are concerned that the main value of the digital tax will go to richer countries, because that is where the sales are. That is true – but they will still get some benefit. For them, the vaccine-sharing proposals, also high on the G7’s agenda, may well be of even more urgent concern.

So why now? The pandemic has created the need for revenues – and for the discussion about vaccine sharing. The crisis has showed, however, that countries might scramble to protect their own interests more than finding common cause. Rivalry and antagonism from China and Russia may have helped the industrialised countries realise an extra need to work together. China is not in the G7 partly because its income per person is still comparatively low, but also perhaps (given that entry to the club has no formal rules) because of the clash of values. Russia, included in what became the G8 in 1997 on the hope that this would encourage democratic values, was thrown out in 2014 because of its invasion of Crimea.

The G7 relies on the 'Tinkerbell factor' – but it is worth preserving

Many people have questioned whether the G7, formed in 1977 to tackle the fallout from the 1973 oil crisis, is an anachronism. Donald Trump, who called it “outdated”, left the 2019 meeting in Biarritz early after rowing with other leaders over his pitch for Russia’s readmission and his refusal to sign a joint communiqué. Last year’s meeting, due to be hosted by the US and which Trump wanted held at a Trump resort, was cancelled because of coronavirus but some delegations clearly felt that rescued the gathering from more bitterness. 

Some diplomats say the annual meeting relies on the 'Tinkerbell factor' – it works as long as participants say they believe in it, a reference to Peter Pan’s exhortation to believe in fairies. However, leaders themselves and their officials often say that meetings in person, coupled with an agenda that deals with their biggest common problems, really do have a chance of breakthroughs that diplomacy by phone and email does not. After 15 months when all global diplomacy has been done by those means and by Zoom, that may even more be the case.