France and Germany have given their backing to United States President Joe Biden’s proposal for a 21 per cent minimum tax on multinational companies, ensuring that they pay a specific rate of tax and pay it proportionally in countries where they do business.

With France and Germany’s acceptance of Biden’s tax plan, it will add momentum to efforts to overhaul global rules, despite reluctance from some smaller European countries. The plan, unveiled earlier this month by the Biden administration, seeks to transform global negotiations after years of being bogged down.

The US proposal is part of a two-pillar strategy for ensuring that multinational companies pay at least a specific rate of tax and that they pay it proportionally in countries where they do business. US technology giants such as Alphabet Inc and Facebook Inc are frequently accused of shifting profits to low-tax locations to reduce their bill.

DIGITAL GIANTS MUST BE TARGET OF NEW RULES

However, countries such as France have said digital giants must be the target of new rules, while successive American governments have rejected any ring-fencing. To resolve that issue, the Biden administration proposed a relatively simple model based in part on profitability that isn’t restricted to specific business types.

It aims to ensure the world’s 100 or so biggest companies pay more in places they actually do business. Still, there are concerns the proposal may not cover companies with low profit margins but high total earnings – most notably Amazon.com Inc.

FRANCE, GERMANY GIVE CONDITIONAL SUPPORT

“If the Biden administration proposes a 21 per cent rate and there is consensus, it would be acceptable for us,” French Finance Minister Bruno Le Maire told Le Figaro and Die Zeit newspapers in a joint interview with his German peer, Olaf Scholz.

According to Scholz, “it is important that we agree on a percentage where exactly that will lie, the talks in the next few weeks will determine…Personally I would have nothing against the US proposal.”

The French government, which is examining the criteria has said it won’t accept a system that doesn’t cover all the digital giants. Parish has indicated that this approach could block the deal entirely, and mean the French government keeps its controversial levy on the revenues of digital firms.

“Our position remains the same: all digital giants should be taxed at their fair value,” Le Maire said in the newspaper interview, adding that “as long as there is no global deal on minimum and digital tax, we will keep our national tax”.

Still, both Le Maire and his German counterpart argued that the change in stance by the US under Biden makes a deal in the coming months more likely.

“We have good hope to reach a deal this summer,” said Scholz, highlighting that “this will change the world, because tax competition is bad for everyone”.

The plan, as espoused by the American president carries a significantly higher levy on companies than the 12.5 per cent minimum tax previously discussed.

LOWER RATES FAVOURED BY COUNTRIES INCLUDING IRELAND

The lower rate was favoured by countries including Ireland, which charges that level of tax to attract corporate investment. Such practices have long been controversial though, and have become more so now that governments have built up massive debt burdens to fight the coronavirus pandemic.

The precise rate of the minimum tax could be one sticking point for a deal that requires the agreement of almost 140 countries. The other pillar, where companies pay tax –is likely to prove even trickier as countries have long been at odds over whether the new arrangement would capture all the biggest technology firms.