G7 tax reform: what has been agreed and which companies will it affect? | G7
The G7 rich nation group on Saturday signed a landmark tax deal to tackle tax abuses by multinationals and online tech companies, agreeing for the first time to a global minimum corporate tax rate.
Although widely hailed by tax campaigners and called a “world change” moment by G7 finance ministers, months and perhaps years of talks have yet to take place before the rules take effect.
Although there is a general agreement between Western economic powers, several other leading countries – including China, India, Brazil and Russia – will be involved in further talks next month. Friction points also remain between countries negotiating reforms – even within the G7. Here’s what’s at stake:
What did the G7 agree to?
The agreed reforms are based on two main pillars: one allows countries to tax a portion of the profits made by large companies on the basis of the income they generate in that country, rather than on where the company is located for tax purposes, and a second setting a minimum global corporate tax rate.
Under the first pillar, countries where multinationals generate income would be granted new tax rights on at least 20% of profits exceeding a 10% margin for the largest and most profitable companies.
The G7 has also pledged a global minimum tax of at least 15%, lower than a 21% proposal put forward by US President Joe Biden earlier this year. However, it is still seen as a turning point and the inclusion of “at least” in the G7 deal means it could be negotiated higher.
Which companies would it apply to?
The Biden administration had suggested that around 100 multinationals would fall under the first pillar. However, it is not known how many are covered by the London agreement.
In embarrassment for European negotiators looking to extract more from large U.S. tech companies, Amazon should not be overtaken by this element of reform. Indeed, its profit margin in 2020 was only 6.3%.
Plans for a minimum global corporate tax rate under the second pillar are expected to affect many more companies, up to around 8,000 multinationals. Amazon and Facebook are expected to fall below the global minimum rate, according to US Treasury Secretary Janet Yellen.
The EU Tax Observatory’s analysis indicates that it would also concern companies such as oil giants BP, Shell, Iberdrola and Repsol, mining company Anglo American, telecommunications company BT and banks such as HSBC , Barclays and Santander.
How much would that bring in?
the OECD estimated last October that up to $ 81 billion (£ 57 billion) in additional tax revenue each year would be raised as part of the reforms. The first pillar would bring in between 5 and 12 billion dollars, while the second pillar, the world minimum rate, would bring in between 42 and 70 billion dollars.
However, this assumed that an overall minimum rate of 12.5% would be applied under the second pillar. It also includes a greater number of multinationals under the first pillar. The Tax Justice Network advocacy group estimates a minimum rate of 21% would bring in 640 billion dollars in underpaid taxes.
There are various estimates of how much each country could recover. According to the Center for Economic Justice think tank of the Institute for Public Policy Research, the UK would reap an additional £ 14.7 billion a year from a global minimum rate of 21%.
Ireland could lose up to € 2 billion (£ 1.7 billion) per year, according to its finance minister, Paschal Donohoe. The country, which levies a 12.5% corporate tax and has lower rates for profits on patents, raised € 11.8 billion in corporate tax last year.
Could it be avoided?
Finance ministers say the rules would be hard to avoid, especially with the backing of the world’s largest western economies. They hope that a strong unanimous message to the G7 will create momentum for a deal to be struck between the larger group of major G20 economies – which includes China, Russia and India.
EU finance ministers also believe that the strength of the G7 deal will mean low tax member states – like Ireland, Hungary and Cyprus, all of which have top tax rates. companies below 15% – will not be able to afford to isolate themselves from the world’s greatest economic powers.
Under the global minimum tax, each country would collect the underpaid taxes from its own multinationals. For example, if a UK company has operations in Singapore, if taxes there were below the minimum rate, it would impose additional tax on those profits to meet the minimum rate.
If a company moved its head office to a low-tax jurisdiction, the rules would allow a country to apply the minimum rate to the company’s operations within its borders if its new parent country did not apply the rate. minimum.
What are the sticking points?
The G7 has agreed to a global minimum tax rate of “at least” 15%, but several countries are pushing for higher rates, despite opposition from some major economies. Discussions should continue on this front.
Amazon avoiding the first pillar rule should lead the UK and EU to push for a wider scope to be applied to capture parts of the business’s activities and to raise taxes on others large companies.
It is understood that the discussions will focus on an approach known as “segmentation”, which means that profitable parts of companies would pay taxes themselves. Under such a rule, Amazon would pay taxes in countries like the UK on the profits of affiliates like Amazon Web Services, its lucrative web hosting arm. AWS achieved a 30% margin in 2020.
The UK and several other EU countries have introduced unilateral taxes on digital services until a global deal is in place. The United States wants them scrapped if a multilateral deal is reached. However, the implementation of the new global rules could take years, meaning that the removal of taxes on digital services in some countries would be far from certain.
The plan for a minimum rate in the United States would also have to go through Congress, which is split 50-50 between Republicans and Democrats, making it harder for the Biden administration. However, tax experts believe that some form of minimum will be agreed.