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Last Saturday the G7 group of wealthy nations signed a historic tax agreement to tackle tax abuses by multinationals and online technology companies, agreeing to a minimum global corporate tax rate for the first time.
Whilst broadly welcomed by tax campaigners and labelled a moment that would ‘change the world’ by G7 finance ministers, months and possibly years of talks to iron out the details still need to take place before the rules come into force.
Notwithstanding the fact that there now appears to be general agreement between the western economic powers, several other leading economic powerhouses – including China, India, Brazil and Russia – will be involved in further talks next month when the matter is considered by the broader G20 group. Sticking points also remain between countries negotiating the reforms – even within the G7.
In short there remains a long way to go before the necessary detail is in place – but there is no doubt that this is a key milestone in the journey to transform the international tax framework.
What has been agreed so far?
Following on from the Biden proposals there are two main pillars to the agreed reforms: one enabling countries to tax some of the profits made by big companies based on the revenue they generate in that country, rather than where the firm is located for tax purposes, and a second setting a minimum global corporation tax rate.
Under the first pillar, countries where multinationals generate revenue would be awarded new taxing rights on at least 20% of profit exceeding a 10% profit margin for the largest and most profitable firms.
The G7 also committed to a global minimum tax of at least 15%, lower than a 21% proposal put forward by the US president, Joe Biden, earlier this year. However, it is still regarded 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 about 100 multinationals would be within the scope of pillar one. However, it is not clear how many are caught by the London agreement. There is a clear emphasis on ‘large multinationals’ and it does not appear to be the case that all companies will be within the scope of these rules – so it is expected that there will be some form of cut off based upon size. This detail is not yet available, however the OECD released a paper in December 2020 which suggested that such a threshold could be set at around the £750m mark in terms of group wide turnover.
There is some confusion as to whether Amazon would actually be caught by the proposals because its profit margin in 2020 was only 6.3% (i.e. under the 10% margin mentioned above). However, according to US Treasury secretary Janet Yellen both Amazon and Facebook are expected to fall under the global minimum rate.
The plans for a minimum global corporation tax rate, under pillar two, are expected to capture far more companies, up to about 8,000 multinationals. Analysis by the EU Tax Observatory indicates it would also catch companies such as the oil giants BP, Shell, Iberdrola and Repsol, the mining firm Anglo American, telecoms firm BT, and banks such as HSBC, Barclays and Santander.
How much would it raise?
The OECD estimated last October that as much as $81bn (£57bn) in additional tax revenues each year would be raised under the reforms. Pillar one would bring in between $5bn and $12bn, while pillar two, the global minimum rate, would collect between $42bn and $70bn. However, these figures assumed that a global minimum rate of 12.5% would be applied under pillar two, whereas that now appears to be a minimum of 15%. It also captures a larger number of multinationals under pillar one. The Tax Justice Network advocacy group estimates that a 21% minimum rate would bring in $640bn in underpaid tax, which is the rate seemingly preferred by the US.
There are various estimates circulating in relation to how much individual countries would recover. According to the Institute for Public Policy Research thinktank’s Centre for Economic Justice, the UK would reap an extra £14.7bn annually from a 21% global minimum rate. Whilst there are winners there are also losers – Ireland, which has a 12.5% corporation tax rate, could lose up to €2bn (£1.7bn) a year, according to its finance minister, Paschal Donohoe.
Are there any loopholes?
Finance ministers believe the rules would be difficult to avoid, especially with the backing of the world’s biggest western economies. They hope that a strong message of unanimity at the G7 will create momentum for a deal to be agreed between the wider G20 group of big economies – which includes China, Russia and India.
EU finance ministers also hope the strength of the G7 deal will mean low-tax member states – such as Ireland, Hungary and Cyprus, which all have corporation tax rates of below 15% – cannot afford to isolate themselves from the world’s biggest economic powers.
Under the global minimum tax, each country would collect the underpaid taxes of its own multinationals. For example, if a UK firm has operations in Singapore, if taxes were lower there than the minimum rate, it would impose an additional tax on those profits to reach the minimum rate.
If a company moved its headquarters to a low-tax jurisdiction, the rules would allow a country to apply the minimum rate to the firm’s operations within its borders if its new parent country did not apply the minimum rate.
What are the sticking points?
The G7 agreed to a global minimum tax rate of ‘at least’ 15%, but several countries are pushing for higher rates, despite opposition from some big economies. Talks are expected to continue on this front.
In order to ensure that Amazon do not avoid the changes it is understood talks will focus on an approach known as ‘segmentation’, meaning profitable parts of businesses would pay tax in their own right. Under such a rule, Amazon would pay tax in countries such as the UK on profits of subsidiaries such as Amazon Web Services, its lucrative web hosting arm. AWS made a margin of 30% in 2020. There is very little detail available on segmentation at the moment.
The UK and several other EU nations have introduced unilateral digital services taxes until a global deal is in place. The US wants them dropped if a multilateral agreement is reached. However, there could be years of implementation for the new global rules, meaning that the removal of digital services taxes in some countries would be far from certain. The US has suggested that in the interim tariffs would be introduced in response – which would be highly undesirable. It’s also not clear whether the tech companies would end up paying more or less tax once the digital service tax has been repealed.
There are some reports that the UK and other EU countries would like an exemption for financial services businesses (i.e. banks). How this would work in practice is unclear and whether other countries would accept the proposal is also uncertain.
The plan for a minimum rate in the US would also need to pass through Congress, which is split 50-50 between Republicans and Democrats, making it harder for the Biden administration. However, tax experts believe some form of minimum tax rate will be agreed.