G7 countries have initiated an agreement that would increase taxes on multinational businesses such as Amazon and Facebook and aims to stop the world’s largest countries from avoiding tax.
The G7 (Group of Seven) has agreed on a multilateral plan that aims to increase taxes on multinational corporations. The arrangement is a monumental shift in international business and taxation. Before this agreement, companies conducting business in multiple nations only paid tax where their headquarters are situated, usually a country with low tax levels. For instance, Facebook paid only £28.5m in tax to the UK government in 2019 as their headquarters are located in Dublin, despite the fact that its revenue exceeded £1.6b. The agreement is two-fold and aims to level the playing field. Firstly, a country will have the right to tax multinationals operating on their shore, which will be applied to “superprofits” — profit margins that exceed 10% of the revenue. Secondly, it establishes a global minimum tax rate to stop countries from intentionally situating their headquarters in nations with lower tax rates and nations from undercutting each other in order to attract multinational corporations. The agreement, which has merely been approved by the G7 countries, is set to be reviewed by other larger nations in the near future.
The first pillar would establish a new right for countries to tax large multinational corporations based on their sales. The guidelines, written by the Organisation for Economic Cooperation and Development (OECD), mainly focuses on large digital businesses and may be applied to “consumer-face businesses” where the corporation may not have a physical presence but sell products directly to consumers, such as Amazon. In addition, the second pillar creates a minimum tax rate that would apply to all large businesses. In the event that the company is not taxed at the minimum rate in the country where they declare tax, the supplementary OECD guidelines would reallocate the taxing rights to another nation. These rules act as a preventive measure to ensure multinational corporations conducting business around the world always pay a minimum rate of taxation. The two pillars have different aims; the former introduces taxes on a new aspect of business — sales — which is a major contributor to a business’s growth and market share. The latter introduces a ‘safety net’ which imposes an obligation on the business to be taxed at a minimum rate irrespective of their location. Due to these differentiating purposes, different corporations will fall under either the first, second, or both.
Biden’s administration officials have reported that 100 multinational corporations would be within the scope of the first pillar, but have not published any names or the thresholds required to bring them into the scope. It is unclear how many would be caught by the London agreement. Tax experts assert that about half of the companies affected would be US companies, including approximately eight digital firms. This is a major shift from the OECD proposals put forwards in 2020, which involved a £647m revenue threshold, and would have captured approximately 2,300 multinationals. According to tax experts, the current plan would apply to all firms, except banks and natural resources firms, and would not include specific tests for online activity. Approximately 8,000 multinationals would fall under the second pillar, and from those would be BP, Shell, Iberdrola and Repsol, BT telecom firm, HSBC, Barclays, and Santander, according to the EU Tax Observatory.
In an embarrassing realisation to European negotiators, whose intentions are to increase taxation on big US firms, Amazon is not expected to be within the scope of pillar one, as their profit margin in 2020 was a mere 6.3%. However, the UK and the EU are likely going to advance and support a broader scope to capture parts of a company’s business and to raise higher tax revenue from large firms. This is explored in detail below when discussing “segmentation”.
The agreement has been dubbed “historic”, as international tax deals are extremely rare, and are often buried by nations with lower tax levels as they are looking to attract major companies with the tax advantages. With this deal, companies will pay taxes even where their headquarters are not located. Above that, G7 ministers have agreed upon a minimum global corporation tax rate of 15% — a rate that can be applied by all nations — that tackles the major inequalities that have emerged between large digital firms and the rest of the business industry. Currently, the corporate tax rate in the UK is 19%, significantly higher than that of Ireland’s, which is 12.5%. Through this, Ireland has managed to attract Big Tech companies, such as Facebook and Google.
A global minimum tax rate could drastically alter the current market, as smaller countries depend on advantages they gain by offering lower tax rates, such as boosts in the economy, higher employment opportunities, and higher tax revenue. For this reason, Ireland has urged larger nations to consider these concerns. Nevertheless, the EU, which Ireland is a member of, is firmly on board with the deal, and other leading nations may become involved in the near future. This is a complete contrast from the United States’ plan a year ago, where Donald Trump was fighting any proposals for a global corporate tax rate. The Trump administration demonstrated support for lower tax rates on multinational corporations as a desire to incentive US Big Tech such as Amazon, Apple, and Google to expand the market, particularly through the rapid rise of tech and the ability to gather and transfer information through these companies. Trump also wanted to prevent China from exercising and taking advantage of its growing digital strength, as the nation has cultivated the general public through platforms such as TikTok and Shein. On the contrary, President Biden has gathered major support for higher tax rates on multinational corporations to aid his post-pandemic and Trump recovery programme and has even pursued a plan for a 21% global tax rate, which was reduced to 15% last week.
For many critics, Biden, the UK Chancellor, and EU leaders should revive and push for a higher tax rate, as a 15% tax level is lower than most developed countries. A majority of EU countries promote a higher tax level, but their effort to present a unified front has been hindered, seeing as Ireland stands with Cyprus and Hungary. Ireland is the co-chair of the eurozone group of finance ministers and a successful lobbyist for lower tax rates. Ireland and Cyprus charge 12.5% corporate tax, while Hungary offers a staggering 9%. An estimate made by the OECD in October 2020 indicated that approximately $81b (£57b) in additional tax revenues would be raised yearly under the new reform, the first pillar generating between $5b and $12b, while the second pillar would gather between $42b and $70b. This estimation assumed a global minimum tax rate of 12.5% under the second pillar, as opposed to the current proposal of 15%. It also includes a larger number of multinationals under the first pillar. However, there are different estimations for individual countries, and according to the Centre for Economic Justice, the UK could possibly secure an additional £14.7b annually if the global minimum rate were 21%. A stark contrast would be Ireland, a nation that could possibly lose around £2b annually, according to its finance minister, Paschal Donohoe.
These speculations and assumptions have raised concerns over the effectiveness of the agreement. Experts have highlighted that Amazon may escape significant payment of taxes in some of its largest markets unless a solution is established for these loopholes. The 10% threshold may exempt Amazon from making any payment under the first pillar, despite the fact that Amazon’s market value exceeds $1.6tn (£1.1tn) and sales above $386b in 2020, simply due to the fact that the company’s profit margin in merely 6.3%, below the established threshold. The corporation’s Luxembourg subsidiary paid nothing towards corporate tax in 2020 on income from sales across Europe, which equated to £38bn. Amazon has adopted a system that allows it to run its online retail business at a significantly low-profit margin by heavily reinvesting in order to gain market share. This raises concerns over whether the tax agreement is effective, as different companies adopt different business models.
Nevertheless, the G7 negotiations are to provide momentum for the more anticipated G20 talks, leading to the OECD. Further negotiations will emphasise an approach called “segmentation”, where profitable sectors of a business would pay tax in nations such as the UK on profits generated from subsidiaries, for example, Amazon Web Services, which made an astonishing profit margin of 30% in 2020. This means that it is possible, and likely, that companies will be able to rearrange their business operations to reduce profit margins well below the 10% threshold. The Chief Executive of Tax Justice Network, Alex Cobham, said: “If the OECD cannot ensure Amazon is in scope, not only will it fail to meet the public demand for fairness here, it will also offer a blueprint for other major multinationals to escape this element of the reform”. The OECD is working towards tighter restrictions in order to eradicate the ability to evade taxes before the G20 meeting is initiated in July.
EU nations, along with the UK and the US, have conceded that unilateral digital services taxation targeting big tech firms, launched last year as a temporary measure until a global multilateral agreement is reached, will be removed, increasing the need to ascertain whether more taxes will be paid towards the UK overall. Facebook has said that it believed the deal will result in the company paying more tax, while Amazon was unable to determine whether higher tax payments are expected. However, a spokesperson from Amazon said: “We believe an OECD-led process that creates a multilateral solution will help bring stability to the international tax system. The agreement by the G7 marks a welcome step forward in the effort to achieve this goal. We hope to see discussions continue to advance with the broader G20 and Inclusive Framework alliance”. Google has also spoken out in support of the G7 tax agreement, saying: “We strongly support the work being done to update international tax rules. We hope countries continue to work together to ensure a balanced and durable agreement will be finalised soon”.
Speculations point towards Amazon being among other corporation paying less taxes or completely exempted from either pillar. Predictions made by the TaxWatch campaign group indicate that the UK Treasury may lose approximately £230m from the tax revenue generated yearly from the four big US tech firms — Amazon, eBay, Facebook, and Google. The results estimate that the companies currently contribute approximately £330 between them to the UK Digital tax revenue. Under the current G7 proposal, this number will fall to £100m. The figure for each company is as follows; Google’s contribution would fall from £219m to just £60m; Facebook’s tax would reduce from £58m to £28m; for Amazon, £50m to £10m; and eBay from £19m to £3.8m. These figures, albeit mere estimates due to the fact that the Treasury does not publish a breakdown of the contributions, are likely to inflect doubt upon the UK government and EU nations. The global government and risk tax leader at the accountancy firm EY, Chris Sanger, has stated: “The UK will not want to turn off the taxing of those global multinationals, under the digital services tax, until it feels it has another tax that can deliver equally or better”.
The redistribution of profits generated by multinational corporations towards multiple nations is essential in today’s interconnecting business sphere, particularly due to the fact that corporations take advantage of lower tax rates while operating globally, reducing their taxes and increasing revenue. Although tax experts believe that the first pillar on redistribution may generate relatively low tax revenue for the UK, the Treasury may still gain approximately £7.9bn annually from the second pillar. Therefore, the UK’s major concern would be reducing the threshold under the first pillar in order to widen the scope and capture big firms that are able to reduce their profit margin and avoid taxation. This means convincing the US to concede without aggravating international relations, seeing as the US, in retaliation to the digital services taxes recently imposed on US corporations, has threatened to enforce punitive tariffs on imports from the UK. In addition, lower-income nations that do not have multinational corporations with headquarters on their land to reap the benefits of a global minimum tax rate would probably not gain much from the limited amount of tax revenue generated under the first pillar and will require persuasion as well–another challenge for the UK during the G20 talks.