G7, G20 and Global Minimum Tax Explained

Context: This topic is important for UPSC Prelims and GS Paper 2.

The Global crises like the pandemic COVID-19, climate change, inequality, tax terrorism, disruptions in supply chains can only be addressed if developed countries (G7) and G20 countries converge on common points and proactively implement the agreed terms.

• The Group of 7 is an informal group of seven countries — the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom, the heads of which hold an annual summit with the European Union and other invitees.
• Together the member countries represent 40% of global GDP and 10% of the world’s population. Unlike other bodies such as NATO, the "Group of Seven" countries has no legal existence, permanent secretariat, or official members.
• It also has no binding impact on policy and all decisions and commitments made at G7 meetings need to be ratified independently by governing bodies of member states.

History of G7-

• The G7 draws its roots from a meeting between the current "Group of Seven" countries members, excluding Canada, that took place in 1975.
• At the time, the global economy was in a state of recession due to the OPEC oil embargo. As the energy crisis was escalating, then  US Treasury Secretary George Schultz decided that it would be beneficial for the large players on the world stage to coordinate with each other on macroeconomic initiatives.
• After this first summit, the countries agreed to meet annually and a year later, Canada was invited into the group which marked the official formation of the G7 as we know it.
• The President of the European Commission was asked to join the meetings in 1977 and following the collapse of the Soviet Union in 1991 and a subsequent thaw in relations between the East and West, Russia was also invited to join the group in 1998.
• Thereafter the group was named the G8 until 2014 when Russia was expelled for its annexation of Crimea from Ukraine.
• The host of the "Group of 7" countries summit, also known as the presidency, rotates annually among member countries in the following order: France, United States, United Kingdom, Germany, Japan, Italy, and Canada.
• The UK holds the G7 presidency for 2021 and has organized the conference for this Saturday at the Carbis Bay Hotel in Cornwall.
• This year, India, South Korea, and Australia have been invited to attend the "Group of 7" countries summit as participating guests. At the end of the summit, the UK will publish a document called a communique which will outline what has been agreed upon during the meeting.

2019 G7 Summit- France

2020 G7 Summit- USA (Didn’t took place because of a pandemic)

2021 G7 Summit- UK (Carbis Bay)

Agenda

• The G7 summit provides a forum for member countries to discuss shared values and concerns. While it initially focused on international economic policy, in the 1980s, the "Group of Seven" countries extended its mandate to include issues related to foreign policy and security as well.
• In recent years, "Group of Seven" countries leaders have met to formulate common responses to challenges encompassing counterterrorism, development, education, health, human rights, and climate change.

Key developments

• The G7 Summit has been the birthplace of several global initiatives. In 1997, the "Group of Seven" countries agreed to provide $300 million to the effort to contain the effects of the reactor meltdown in Chernobyl.
• Then, at the 2002 summit, members decided to launch a coordinated response to fight the threat of AIDS, Tuberculosis, and Malaria.
• Their efforts led to the formation of the Global Fund, an innovative financing mechanism that has disbursed more than $45 billion in humanitarian aid and, has saved the lives of over 38 million people.
•  More recently, the Global Apollo Program was launched out of the 2015 G7 summit meeting. Designed to tackle climate change through clean energy research and development, the Apollo Program was conceived by the UK but failed to generate traction until the other "Group of Seven" countries agreed to support it.
• The Programme calls for developed nations to commit to spending 0.02% of their GDP on tackling climate change from 2015 to 2025; an amount that would total USD 150 billion over a 10-year period.

Despite its achievements, the G7 has also come under significant criticism and has been involved in a number of controversies.

• Until the mid-1980s, "Group of 7" countries' meetings was held discreetly and informally.

• However, after discussions at a "Group of 7" countries summit in 1985, member countries subsequently signed the Plaza Accords, an agreement that had major ramifications for global currency markets.
• Their actions caused strong international backlash, with other nations upset by the fact that a meeting between a small group of countries could have such a disproportionate effect on the world economy.
• Following that backlash, the G7 began to announce the agenda for their meetings in advance so that markets could prepare themselves for potential changes in global macroeconomic policy.
• However, several countries and individuals still perceive the "Group of 7" countries as an exclusive, closed group that blatantly exercises its power over other nations. As a result, virtually every summit since 2000 has been met with protests and demonstrations in the country in which it has been held.
• Clashes between the members -The election of Donald Trump in 2016 also caused some friction between the G7 member nations. Ahead of the "Group of Seven" countries summit in Sicily in 2017, Trump refused to recommit the US to the 2015 Paris Climate Agreement and criticized Germany for its trade surplus, threatening to block the US import of German cars.
• In response, German Chancellor Angele Merkel questioned the cohesiveness of the G7, saying that for the first time since the Second World War, Europe “must take fate into our own hands.”
• At that year’s G7 summit, member countries took the unusual step of excluding the US from their final communique, stating that the US was still considering its role in the Paris Agreement.
• That year, Trump also asked that Russia be reinstated into the group, a suggestion that was rejected by the other nations.
•  In 2020, the G7 summit was cancelled for the first time as a result of the Covid-19 pandemic.

India and G7

• The G7 has been criticized for being outdated and ineffective in recent decades due to its exclusion of two of the world’s largest economies in India and China.
• Several think tanks have called for India’s inclusion into the group; however, some argue against it, pointing to India’s much lower GDP per capita relative to other states.
• While not being an official member of the group, India has been invited to the 2021 G7 summit as a special guest, making this year the second time that Prime Minister Modi has been asked to participate in discussions.

CARBIS BAY G7 SUMMIT COMMUNIQUÉ

G7 leaders agreed on a shared "Group of Seven" countries agenda for global action to:

• End the pandemic and prepare for the future by driving an intensified international effort, by increasing and coordinating on global manufacturing capacity on all continents; improving early warning systems; and supporting science in a mission to shorten the cycle for the development of safe and effective vaccines, treatments and tests from 300 to 100 days.
• Reinvigorate G7 economies by advancing recovery plans that build on the $12 trillion of support that has been put in place during the pandemic. Shifting the focus from crisis response to promoting growth into the future, with plans that create jobs, invest in infrastructure, drive innovation, support people.
• Secure our future prosperity by championing freer, fairer trade within a reformed trading system, a more resilient global economy, and a fairer global tax system that reverses the race to the bottom. Effective collaboration to ensure future frontiers of the global economy and society, from cyberspace to outer space, increase the prosperity and wellbeing of all people while upholding our values as open societies.
• Protect the planet by supporting a green revolution that creates jobs, cuts emissions, and seeks to limit the rise in global temperatures to 1.5 degrees. G7 committed to net zero no later than 2050, halving our collective emissions over the two decades to 2030, increasing and improving climate finance to 2025; and conserving or protecting at least 30 percent of land and oceans by 2030. 
• Strengthen G7 partnerships with others around the world. "Group of Seven" countries resolved to deepen their current partnership to a new deal with Africa, including by magnifying support from the International Monetary Fund for countries most in need to support their aim to reach a total global ambition of $100 billion.
• Embrace G7 values as an enduring foundation for success in an ever-changing world. Values such as the power of democracy, freedom, equality, the rule of law, and respect for human rights, to promote equality, especially gender equality, by supporting a target to get 40 million more girls into education and with at least $2¾ billion for the Global Partnership for Education. 

What is the global minimum tax deal and what will it mean?

Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.

• A global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed upon by 136 countries.
• As per OECD – Kenya, Nigeria, Pakistan, and Sri Lanka – had not yet joined the agreement, but that the countries behind the accord together accounted for over 90% of the global economy.

Why a global minimum tax?

• With budgets strained after the COVID-19 crisis, many governments want more than ever to discourage multinationals from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
• Increasingly, income from intangible sources such as drug patents, software, and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.
• The minimum tax and other provisions aim to put an end to decades of tax competition between governments to attract foreign investment.

How would a deal work?

• The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) in sales globally. Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits.
• A second track of the overhaul would allow countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue.

What happens next?

• Following agreement on the technical details, the next step is for finance ministers from the Group of 20 economic powers to formally endorse the deal, paving the way for adoption by G20 leaders at an end October summit.
• The agreement calls for countries to bring it into law in 2022 so that it can take effect by 2023, an extremely tight timeframe given that previous international tax deals took years to implement. Countries that have in recent years created national digital services taxes will have to repeal them.

What will be the economic impact?

• The OECD, which has steered the negotiations, estimates the minimum tax will generate $150 billion in additional global tax revenues annually.
• Taxing rights on more than $125 billion of profit will be additionally shifted to the countries where they are earned from the low tax countries where they are currently booked.
• Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.

However, various deductions and exceptions baked into the deal are at the same time designed to limit the impact on low tax countries like Ireland, where many US groups base their European operations.

What is the G20 summit and why is it important? 

G20 or Group of Twenty is an intergovernmental forum comprising 19 countries and the European Union (EU). It works to address major issues related to the global economy such as international financial stability, climate change mitigation, and sustainable development.

"Group of Twenty" countries include both industrialized and developing nations, and account for around 90% of gross world product(GWP), 75–80% of international trade, two-thirds of the global population, and roughly half the world's land area.

The G20 was founded in 1999 in response to several world economic crises.

How often do the "Group of Twenty" countries meet?

The G20 rotates chairpersons and the members’ leaders initially met twice a year, but this was reduced to once a year since 2011. The leaders’ meetings are usually preceded by ministerial meetings by trade ministers, finance ministers and central bank governors, which are designed to set the agenda for the meetings of the world’s most powerful leaders.

"Group of Twenty" countries summits 

2020 Summit -Saudi Arabia

2021 Summit -Rome, Italy

2022 Summit – Indonesia

2023 Summit – India

What have been the G20’s perceived achievements?

• In Buenos Aires in 2018, these were “the future of work, infrastructure for development and a sustainable food future”.
• The 2019 "Group of Twenty" countries summit discussed eight themes: global economy, trade and investment, innovation, environment and energy, employment, women's empowerment, development, and health.
• The "Group of 20" countries was also credited with helping avert a shift to protectionism post-global financial crisis in 2008, tripling the International Monetary Fund’s budget and giving development banks more remit.
• In Riyadh summit 2020 G20 countries mobilised resources to address the immediate financing needs in global health to support the research, development, manufacturing and distribution of safe and effective Covid-19 diagnostics, therapeutics and vaccines, with special emphasis to African Nations.

What have been the G20’s perceived failings?

• The "Group of 20" is widely perceived to have failed to address global inequality. The expansion of the G7 to include more emerging economies brought hope that this would be addressed, but in most member states, inequality is widening.
• The G20, like many plurilateral organizations, is often dismissed as a “talking shop”, where leaders offer plenty of blusters, but achieve very little material progress.
• The recent "Group of 20" summit held in Rome witnessed the absence of leaders like Xi Jinping and Vladimir Putin, also raising questions over its importance.

G20: what did world leaders agree on at the summit in Rome?

The "Group of 20" leaders had a full agenda including climate change, the Covid pandemic, a landmark tax deal, and global economic worries. Here is a summary of what they agreed:

Climate change

• Leaders committed to the key Paris Agreement goal of limiting global warming to 1.5 degrees Celsius above pre-industrial levels.
• They also pledged to reach a target of net-zero carbon emissions by or around mid-century.
• they agreed to stop funding new dirty coal plants abroad by the end of 2021 and reaffirmed the so far unmet commitment to mobilize $100bn for developing countries for climate adaptation costs.
• First time acknowledged the use of carbon pricing mechanisms and incentives” as a possible tool against climate change.

Taxation

• Leaders put their seal of approval on an agreement that will subject multinationals to a minimum 15% tax, as part of an effort to build “a more stable and fairer international tax system”.

  US internet giants such as Amazon, Google parent Alphabet, Facebook, and Apple – which have benefited from basing themselves in low-tax countries to minimize their tax bills – are particular targets of the new global regulation. The reform, brokered by the OECD and backed by 136 countries representing more than 90% of world GDP, has long been in the making and is supposed to come into effect in 2023, where countries need to pass national legislation in this regard.

 Vaccines

• Leaders vowed to support the WHO’s goal of vaccinating at least 40% of the world’s population against Covid-19 by 2021, and 70% by the middle of next year, by boosting the supply of vaccines in developing countries and removing supply and financing constraints.

Global economy

• Meeting as rising inflation, pushed by spiking energy prices, and supply chain bottlenecks are weighing on a world economy still reeling from Covid-related disruptions, G20 leaders ruled out a hasty removal of national stimulus measures.

Development aid

• Leaders set a new target of channelling $100bn towards poorest nations, coming from the $650bn pot made available by the International Monetary Fund (IMF) via a fresh issuance of its Special Drawing Rights (SDR).

Leaders also adopted the 'Rome Declaration' which gives a very strong message under the health section with the countries agreeing that the COVID-19 immunization is a global public good.

EDITORIAL-The big push

Biden will have to negotiate to promote his vision for social security and climate change

• In what appears to be a rush to the finish line but is in fact the intention to fulfill long-standing policy promises of the Democratic Party, U.S. President Joe Biden sought to push through Congress an omnibus mega-bill seeking $1.85 trillion for social security and climate change.
• While the initiative seemed to be thrust forward on a shorter timeline so that Mr. Biden could speak of his domestic agenda achievements at the G20 meeting in Rome and COP26 in Scotland, the once-in-a-generation bill speaks to issues such as providing universal pre-kindergarten, extending an expanded tax credit for parents, further reducing health-care premiums for those covered under the Obama-era Affordable Care Act, reducing a waiting list for in-home care, building a million units of low-income housing, and worker training and higher education.
• To balance the implied considerable hike in federal public expenditure, the bill proposes to raise revenue via a 15% minimum tax on the reported profits of large corporations, clamping down on profit-shifting by multinationals, tighter enforcement for large corporations and ultra-high net worth individuals, a 1% tax on corporate tax buybacks, an additional 5% tax on incomes exceeding $10 million a year and another 3% tax on incomes above $25 million, and policies to limit business losses for the very wealthy and a 3.8% Medicare tax on people earning more than $400,000 a year who did not previously pay that tax.
• Although Democrats have 50 Senators in the Upper House of Congress and Vice-President Kamala Harris could cast a tie-breaking vote should the need arise, the passage of this bill will be remembered as a major component of Mr. Biden’s legacy, hangs on the razor’s edge.
• This is in part because at least two Senators, from Arizona and West Virginia, are potential holdouts. The conundrum that Mr. Biden is facing is a paradox of omnibus bills — different constituents view only some parts of the bill as desirable.
• For example, House Democrats appear unwilling to pass a version of the bill that the Senate has already cleared, sanctioning a $1 trillion bipartisan infrastructure package.
• Lawmakers such as Pramila Jayapal have opined that the Congressional Progressive Caucus would only support the broader vision of the Build Back Better Act, which includes the ambitious climate change programme, federally paid leave for families, a substantial expansion of Medicare policy, and two free years of community college.
• To succeed, Mr. Biden will have to negotiate with all stakeholders to find a compromise formula. At stake is the U.S.’s prospect of climbing out of the recessionary economic trough it was pushed into by the pandemic, not only by directly spurring commercial activity through public expenditure but also by investing in education and social security to keep America’s workforce competitive.

Way Forward

World leaders need to put proactive legislation and policies in place to deal with global crises like climate change, tax terrorism, and global inequality of all forms. G20 platform which provides a space for collaboration and consensus can only achieve its intended goals if the countries and multilateral institutions provide the needed financial and technical aid to overcome global challenges.VVvvvn