Global corporate tax reform: what are the key issues in the G7 negotiations? | Tax evasion
G7 finance ministers are expected to agree Friday on backing a global minimum corporate tax rate as part of talks in London between the group of wealthy nations.
The potential landmark tax reform comes as governments around the world grapple with record levels of government borrowing during the coronavirus pandemic.
The United States drew attention on Wednesday by threatening to impose punitive tariffs on exports from the United Kingdom and five other countries in retaliation for digital services taxes recently imposed on American companies. Biden’s proposals seek to replace these unilateral measures by creating international agreements that capture the huge profits made by Apple and Microsoft in Europe and elsewhere.
Any deal would follow years of false starts to try to ensure multinationals and tech giants pay their fair share of taxes. The reforms would limit how big companies can shift profits to low-tax jurisdictions. Here are the details behind the G7 negotiations.
What’s on the table right now?
Negotiations to reform the global tax system have been underway since the aftermath of the 2008 financial crisis, with the latest discussions taking place between 135 countries at the Organization for Economic Co-operation and Development (OECD) in Paris. It is hoped that the G7 backing will spark wider support at a meeting of G20 finance ministers in Italy next month. The aim is to reach an agreement by October.
There are two main pillars of the plan being negotiated.
Under the first pillar, countries would get a new right to tax a share of the profits generated in their jurisdiction by a multinational headquartered abroad. This would mean taxing the source of a business’s revenue, such as sales of shoes or digital services, regardless of the physical location of the business.
Under the second pillar, a minimum corporate tax rate would be imposed by countries on the overseas profits of large corporations headquartered in their jurisdiction. The minimum rate would only apply to multinationals whose revenues exceed a certain threshold – the specifics of which will be at the heart of the talks. The tax would be paid to the country where the parent company of the multinational is based.
US President Joe Biden has proposed a minimum rate of 21%, but Washington has since lowered that recommendation to 15% to win support for reforms from other countries.
What companies would does it apply?
The Biden administration has proposed that about 100 multinationals fall under the first pillar. He did not publish a list of those companies, or the thresholds that would have to be applied to bring them into the scope, but tax experts estimate that about half of those affected would be American companies, of which about eight digital companies.
Washington’s plans will likely replace OECD proposals presented last year, which included a revenue threshold of 750m euros (£647m), with criteria to focus on ‘automated digital services and “consumer-facing businesses,” with a profit margin. 10% threshold. This would have captured about 2,300 multinationals.
The United States had previously balked at measures targeting digital companies, which are largely based on its shores. The Biden plan would not include specific tests for online activity and would apply to all businesses except banks and natural resource firms, tax experts say.
Plans for a global minimum corporate tax rate, under the second pillar, would affect up to 8,000 multinationals.
Analysis by the EU Tax Observatory indicates that the companies that would be forced to pay more taxes would be the oil giants BP, Shell, Iberdrola and Repsol, the mining company Anglo American, the telecommunications company BT and banks such as HSBC, Barclays and Santander.
How much would that bring?
The OECD estimated last October that up to $81bn (£57bn) in additional tax revenue would be raised each year as part of the reforms. The first pillar would raise between $5 billion and $12 billion, while the second pillar, the global minimum rate, would collect between $42 billion and $70 billion.
However, this assumed that an overall minimum rate of 12.5% would apply under the second pillar. It also includes a larger number of multinationals under the first pillar. Advocacy group Tax Justice Network estimates that a minimum rate of 21% would result in $640 billion in underpaid taxes.
There are various estimates of how much each country would recover. According to the Center for Economic Justice at the Institute for Public Policy Research think tank, the UK would reap an extra £14.7bn a year from a global minimum rate of 21%.
Ireland could lose up to 2 billion euros a year, according to its finance minister, Paschal Donohoe. The country, which levies a 12.5% corporation tax and has lower rates for patent profits, demanded 11.8 billion euros in corporation tax last year.
Could it be avoided?
Tax experts say avoidance would be difficult, especially if the changes are backed by a broad group of the world’s biggest economies. With very few businesses likely to fall into the first pillar, the system would be easier to administer – but therefore might not be as transformative.
Under the second pillar, each country would collect 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 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 company’s operations within its borders if its new parent country did not apply not the minimum rate.
What are the sticking points?
The scope of the new rules for deciding which companies are included and the thresholds for determining what part of profits is taxable are key negotiating points.
Talks will continue on where the minimum rate should be set. Some mid-sized economies have corporate tax rates below the minimum proposed by Washington – such as Ireland at 12.5% and Hungary at 9%. However, tax experts believe a deal could still be done as 15% is not a big raise.
The UK is concerned about the limited scope of the first pillar. Ministers want US tech giants to pay a fair share of tax based on the revenue they generate in Britain.
The UK and several other EU countries have introduced unilateral digital service taxes to address this issue. The United States wants them to be dropped if a multilateral agreement is reached. However, it could be years from the implementation of the new global rules, meaning the removal of digital service taxes in some countries would be far from certain.
The plan for a minimum rate in the United States would also have to pass through Congress, which is split 50-50 between Republicans and Democrats, making it difficult for the Biden administration. However, tax experts believe that some form of minimum will be agreed.