WHAT JUST HAPPENED?
At the recent G7 conference held across 11-13 June 2021, leaders of some of the world’s wealthiest and most powerful nations pledged to make multinational companies pay more tax.
WHAT DOES THIS MEAN?
Under the plans, a global minimum tax rate of 15% would be introduced and companies would be forced to pay tax in any country in which they make at least 10% profit on sales.1
Tax is rarely out of the news, especially this year with the heavy financial cost of Covid-19 forcing governments around the world to find new ways to balance the books. The pandemic has also increased public scrutiny on strategies used by tech giants such as Amazon and Google to pay as little tax as possible.
The G7 agreement aims to tackle both these problems.
The first ‘pillar’ is a worldwide 15% minimum rate for corporate tax, targeting tax havens and preventing any individual country from attracting foreign investment by setting minimal rates.
The second aims to close a loophole that enables large corporations to divert profits made in one country to another with more amenable fiscal arrangements. For instance in 2020, a subsidiary of Amazon headquartered in Luxembourg did not pay any corporation tax despite sales in Europe totalling £38bn.2 If the G7’s plans are successful, the world’s 100 richest companies would have to pay 20% tax in any country in which profits exceed 10% of sales.
As with environmental legislation, these measures require worldwide cooperation to have the desired effect. All it takes is for one country to disregard the new rules for the whole system to collapse as companies rush to take full advantage of tax breaks. There have already been some early signs that there may be trouble on the horizon.
The first problem is that the G7 is likely to incur the wrath of countries in the broader G20 bloc for announcing these plans as their own at their recent summit. This is misleading since both parts of the deal derive from earlier discussions with the ‘Inclusive Framework’, a network of over 130 countries that work together to find solutions to tax avoidance.3 Presenting the deal as a uniquely Western idea is unlikely to please Brazil, China, or India, who will all be present when the G20 next meets in Venice next month (July 2021).
Another criticism is that these plans simply do not go far enough to act as a disincentive for the world’s richest countries. According to the Financial Times, the extra tax raised would only amount to 4% of global corporate tax receipts.4 This makes it unlikely that multinational companies will change their behaviour in the long run.
HOW DOES THIS IMPACT THE LEGAL SECTOR?
Expect years of legal wrangling before any global tax agreement comes into force.
Political tit-for-tat will determine how flexible and ambitious the final deal will be. UK Chancellor Rishi Sunak wants the financial services firms to be exempt, since banks already usually pay taxes on profits made in different countries.5 Similarly, China may well push for an exemption for its ‘special economic zones’, such as Shanghai, which have served to boost the national economy over the past few decades by offering favourable tax arrangements to foreign companies.6
Then there is the question of unilateral tax laws. France, for instance, sparked a war with words with the US late last year after announcing a 3% digital services tax on big tech companies.7 As it stands, neither France nor the UK have formally agreed to drop their national taxes, which will further increase friction with Washington.
Finally, there is a possibility that this laudable attempt to close loopholes may, ironically enough, have created another. Under the current plans, any company that makes less than 10% sales on profits in any given country will be exempt. As it stands, Amazon would be let off the hook, as it operates on very low profit margins (6.3% in 2020).8 This loophole should be closed to ensure that the final legislation is as fair as possible.
A headache for legislators, the G7’s tax plan should nevertheless provide a plentiful supply of work for to lawyers and tax professionals. On the compliance side, multinationals will have two new taxes to deal with, alongside any unilateral deals already in place. As for tax advisory services, companies looking to remain as tax efficient as possible may be on the lookout for creative ways to mitigate the effects of these plans.
By Tom Higgins Toon
ASSESSING FIRMS
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REFERENCES:
[1] Michael Race, ‘G7 tax deal: What is it and are Amazon and Facebook included?’, (BBC News, 11 June 2021) <www.bbc.co.uk/news/business-57384352> Accessed 20 June 2021
[2] Jasper Jolly, ‘Global G7 deal may let Amazon off hook on tax, say experts’ (Guardian, 6 June 2021) <www.theguardian.com/technology/2021/jun/06/global-g7-deal-may-let-amazon-off-hook-on-tax-say-experts> Accessed 20 June 2021
[3] Rasmus Corlin Christensen, ‘The G7 tax deal: ‘historic’ and ‘global’?’, (ICTD, 7 June 2021) < <www.ictd.ac/blog/g7-tax-deal-historic-global/> Accessed 20 June 202
[4] Richard Waters, Emma Agyemang, Aziza Kasumov, and Tim Bradshaw, ‘Multinationals shrug off G7 tax assault’, (Financial Times, 11 June 2021) <www.ft.com/content/8dbf9b04-0e2e-411f-a562-ce267e269e74> Accessed 20 June 2021
[5] William James and Leigh Thomas, ‘UK pushes for financial services to be exempt from G7 global tax plan’, (Reuters, 9 June 2020) <www.reuters.com/article/us-nr3cphpf-nr3cphp-us-g7-britain-sunak-idTRNIKCN2DL2NN> Accessed 20 June 2021
[6] Leigh Thomas, ‘Exception to the rule? G7 deal on tax triggers carve-out talk’, (Reuters, 10 June 2021) <www.reuters.com/business/finance/exception-rule-g7-deal-tax-triggers-carve-out-talk-2021-06-10/> Accessed 20 June 2021
[7] Romain Dillet, ‘France starts collecting tax on tech giants’, (TechCrunch, 25 November 2020) <techcrunch.com/2020/11/25/france-starts-collecting-tax-on-tech-giants/> Accessed 20 June 2021
[8] Ibid [n2]
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.