The G7 countries of the US, the UK, Canada, Germany, France, Japan and Italy met in Carbis Bay in Cornwall for a three-day meeting which ended last Sunday, 15th June 2021
Ahead of the summit, the G7 finance ministers agreed to tackle tax avoidance by multi nationals and tech companies to pay more tax in the countries where thy sell their goods and services and to a minimum global corporation tax rate of 15%
Chancellor Rishi Sunak described the deal as ‘historic’ and ‘seismic’, but if it was that much of a shift why were the big tech stocks not much moved by the announcement?
The truth of the matter is that although the Campaign group Tax Watch estimates that tech giants avoided £1.5 billion of UK taxes in 2019 the changes announced will not necessarily see this sum finding its way back into the Treasury’s coffers.
The tax changes only affect the top 100 biggest global companies with profit margins of at least 10% which means that Amazon which does not make 10% profit is not included and then only have to pay tax on the next 20% in the countries where they make the sales, rather than where they are tax registered or resident.
What is possibly of greater importance is the agreement to have a minimum corporation tax rate of 15% on overseas profits, which together with over anti-avoidance measures should make it unattractive to shift profits from a high tax jurisdiction to a low tax jurisdiction.
Again, this is not as dramatic as it may appear, since within the OECD club of rich nations only Ireland (12.5%), Chile (10%) and Hungary (9%) have a corporate tax rate lower than 15%
The biggest winner of course will probably be the US which would will receive increased revenue form its tech giants and other US multinationals.
What is however seismic is that these G7 countries have agreed to give up a little of their tax sovereignty to tax their resident individuals and companies and line up behind Biden to co-operate and tackle global issues.
Taxing corporations according to where they were registered or tax residence – which is usually determined by where the high-level decisions affecting the company were taken was fine in the past because the high-level decisions were usually taken where the company made its profits – but as multinational businesses have grown they can use these now well understood rules of tax residence to set up where the company can pay the least tax. For many people these global companies should not be allowed to pay such little of their profits in tax by basing their companies in tax havens or low tax jurisdiction.
It is unfair, but don’t forget that a director of a multi-national organisation is under an obligation to maximise the returns for his shareholders, and this means reducing the tax burden wherever possible.
Attempts have been made over the years to make it harder for such multi-national companies to set up where they chose and to book business through these low tax jurisdictions – by making ‘brass plate’ entities ineffective in the tax avoidance plan To be effective the company must now have ‘substance’, real employees or administrative staff doing real work.
The introduction of the ‘substance’ rules was great for these tiny offshore jurisdictions since is meant more work for the islanders – and not just the trust and company administrators but also the accountants, lawyers, hospitality and travel industries. So, these jurisdictions could be very hard hit by these announcements.
One concern which has been voiced but which I think is a red herring, is that the higher tax rates will mean higher prices for the consumer, this is unlikely since what is being proposed is currently very modest – and is more than likely to be offset by significant savings as Directors around the world look into ways of saving costs through scaled down office space as workers continue to work from home and reduced travel budgets as employees are encouraged to use digital ways of communicating rather than face to face meetings.
The G7 Club emerged organically in the 1970s as an informal forum. The countries then accounted for some 80% of global GDP but with the rise of China it accounts for only 40%
However the proposals will need to be passed by the G20 it Italy next month when other big nations including China, India, Brazil and Russia will take part – and then it will need to be put to the 135 countries of the Organisation for Economic Co-operation and Development – but I would suggest it will be introduced before the year is out.
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