A historic agreement has been reached. For decades, multinational corporations have abused gaps in an international tax system that has barely changed since agreements made at the League of Nations in the 1920s.

After meetings in London at the weekend, the message from the G7 group of wealthy nations is clear: time is up on tax havens. In a landmark move, a global minimum rate of corporation tax has been agreed, alongside measures forcing large firms and online tech giants such as Facebook, Apple and Google to pay more tax in the markets where they make their money regardless of physical presence.

Much remains to be hammered out – in a process likely to take several years before a single extra pound, dollar, euro or yen has been handed over – but a clear direction of travel has been set.

Despite the historic milestone, the London agreement is about far more than just tax. That will become clearer when Boris Johnson, Joe Biden and the other heads of G7 governments meet at Carbis Bay in Cornwall later this week.

As with most global negotiations, the real story is about who holds the balance of power and the reconciling of domestic interests with international demands. For the G7 – made up of the US, Canada, UK, Germany, France, Italy and Japan – it is no different.

For Rishi Sunak, hosting the meeting of finance ministers as the UK holds the rotating G7 presidency, it was about sending a message that post-Brexit Britain still holds sway in the world. Sources close to the talks said initial UK reluctance to back the Biden plan for a global minimum tax rate centred on dragging Washington closer to trade talks. There were concerns within the Tory party to manage over-sacrificing tax sovereignty, while the chancellor wanted to haggle better terms to raise more tax for Britain from big US tech companies.

Despite attempting to drive a hard bargain, it is unclear what, if anything, Sunak managed to extract beyond headlines suggesting Britain is an awkward ally. Washington had also made it clear exactly where the balance of power lies: threatening to impose punitive tariffs on the UK and EU countries if they didn’t drop their unilateral digital services taxes.

Britain, France and several other countries have used these digital taxes on US tech firms as a stopgap measure until a global deal is implemented, raising hundreds of millions for their national exchequers. Although Washington had demanded their immediate removal – in a likely sticking point for future progress – a specific agreement for a global minimum rate of “at least” 15% shows that such hurdles can be overcome.

For Biden, a global minimum tax is core to his economic agenda as he attempts to raise more revenue to fund a $1.9tn (£1.3tn) Covid recovery plan. The president is likely to face stiff opposition from Republicans in Congress, which could derail further progress. Reaching a deal between the world’s most powerful economies helps to strengthen his bargaining power.

For the EU nations – Germany, France and Italy – it was about a display of unity to the rest of the bloc. Ironic for a deal agreed in London six months from Brexit, this was a moment to forge closer EU integration.

The fragile European project is incomplete without closer coordination on tax, as the sovereign debt crisis of a decade ago brutally exposed. Several member states apply corporate tax rates below 15%, including Ireland, Hungary and Cyprus. The bloc’s biggest powers view such tax dumping as incompatible with EU ideals.

Brussels requires unanimity on tax changes, making this a key issue for the tax reform becoming a reality. But in reaching a deal in London, the EU’s finance ministers hope they can build unstoppable momentum.

Several other key details remain to be overcome. There are concerns that a stitch-up between the G7 will benefit the western powers most, at the expense of lower-income countries in the global south. Talks will progress to the G20 in Italy next month when other big nations – including Russia, China, India and Brazil – will join negotiations, before haggling between 135 nations at the Organisation for Economic Co-operation and Development, with an aim to reach a global deal by October.

It is for this reason that the G7 agreement is a point on the road rather than the final destination. It will be several years before a deal is implemented. However, issuing a unanimous agreement is designed to build enough momentum to bulldoze the rest of the world into line after years of stalling progress.

There were also wider political and economic motives. After the chaos of the Trump years, a message is being sent to China, Russia and the rest of the world that the west is back in business. G7 finance ministers fear Beijing wants to do away with the old rules of the global economy dating back to Bretton Woods, seeking to replace it with a system benefiting China. Reaching a deal in London is designed to signal that the western powers are once more willing and able to dictate the rules in the 21st century.

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In the wake of the Covid-19 pandemic, and after decades of neoliberal politics lining the pockets of the few rather than the many, the underlying message of the G7 deal is also about reasserting the power of government over big business. Sources close to the talks said there was broad agreement that, for now at least, soaring budget deficits incurred during the pandemic matter far less than a sustainable recovery – raising the prospect that big state economics will be a lasting legacy of the pandemic.

Tears are being shed on the neoliberal right that the western powers are killing-off vital competition between nations by agreeing a minimum tax rate. The free-market Adam Smith Institute argues the Americans fought a revolution to ensure their tax rates weren’t set in Westminster without representation. They awaken now in horror to find the British have agreed, on their own turf, to have their tax rates set by Washington.

This might sound like the last kick of a dying ideology that has held sway for four decades, but it is an argument likely to stir low-tax Tories.

However, public opinion after the pandemic has shifted to the point where these concerns are irreconcilable. Long before Covid-19 no one could understand why the biggest companies paid less tax because of loopholes in the system of international tax – a system built on neoliberal ideals.

Before the crisis it was difficult to understand; after the crisis it is impossible to accept.



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