The Finance Ministers of the world’s seven most “advanced economies” had their meeting in the Cornwall sunshine this week end. And they’ve agreed to, what Chancellor Sunak calls, “seismic tax reforms”.
The headline grabber being a solution to the continual tax avoidance of huge tech companies – a minimum global corporation tax rate.
Who are the G7?
The ‘G’ simply stands for ‘Group’, so this is a ‘group of seven’ leading world economies. They are Canada, France, Germany, Italy, Japan, the UK and the USA. It was the G8, until Russia invaded Crimea in 2014 and was thrown out.
There are usually EU representatives present and other countries are also sometimes invited. For example, Australia, India and South Korea were invited to send representatives to this year’s meeting.
The most notable missing member is China, given that it has the highest population in the world. But they are not considered to be an ‘advance economy’ by G7 definition because their individual citizens have comparatively low level of wealth.
What’s the new agreement on multinational tax avoidance?
Global companies, like Google and Amazon, are notoriously problematic to governments around the world. By setting up main registered addresses in countries with lower corporation tax, they can run all profits through that office, even money earned in other countries. They, perfectly legally, benefit from the lower taxes.
And we look on aghast at the imbalance between the money they earn from UK sales and the corresponding amount of UK tax paid. And this is the same in all of these other countries. It isn’t fair that local companies have a higher Corporation Tax bill than Microsoft.
As a major step forward, the G7 have agreed two ‘pillars’ for reform:
- Pillar One: The biggest companies have to pay tax in the country where they operate, not just where their HQ is registered. “The rules would apply to global firms with at least a 10% profit margin – and would see 20% of any profit above the 10% margin reallocated and then subjected to tax in the countries they operate.”
- Pillar Two: “…the principle of at least 15% global minimum corporation tax operated on a country by country basis, creating a more level playing field for UK firms and cracking down on tax avoidance.”
These issues have been discussed for many years and the fact of an agreement is quite the step forward.
They also agreed that this new Corporation Tax would replace any new Digital Services Tax that countries, like the UK, already have in place.
What are people saying about this collective move?
There is broad support for the direction of this move. But not everyone is as keen to use such dramatic wording.
Chancellor Rishi Sunak seems delighted, saying: “These seismic tax reforms are something the UK has been pushing for and a huge prize for the British taxpayer – creating a fairer tax system fit for the 21st century.
“This is a truly historic agreement and I’m proud the G7 has shown collective leadership at this crucial time in our global economic recovery.”
President Biden overturned Trump’s policy and originally suggested a 21% Corporation Tax base rate. The consensus is that an agreement of a lower minimum is more valuable than anyone digging their heels in over a specific amount, as it can go up in the future.
Especially when you consider the position of countries with lower Corporation Tax rates that have been benefiting from the status quo. Such as Ireland and Cyprus at 12.5%, and Hungary at 9%.
Others are very unimpressed by the 15% figure. Gabriela Bucher, Oxfam’s executive director, told the BBC: “It’s absurd for the G7 to claim it is ‘overhauling’ a broken global tax system by setting up a global minimum corporate tax rate that is similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore. They are setting the bar so low that companies can just step over it.”
She feels that the disparity between wealthier and poorer countries will only be reinforced.
What about the companies themselves?
Google said: “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.”
Ex Deputy Prime Minister, current Vice-president for Facebook’s global affairs, Nick Clegg tweeted: “We want the international tax reform process to succeed and recognise this could mean Facebook paying more tax, and in different places.”
A spokesperson for 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.”
All very up-beat responses to something that will increase these companies’ tax bills considerably. But at least they’ve avoided that 21%.
Does this mean the problem of multinational tax avoidance is solved?
Unfortunately, it doesn’t work that quickly or simply. There has been an important political agreement, that identifies clear principles, between influential country’s leaders. Actually implementing the policy at a practical level will take time.
And it needs to encompass more than these countries to be a truly global agreement that involves the fair distribution of tax across the world. This policy will be discussed with the G20 at their meeting in July. The more countries that are involved, the more successfully this fairer taxation and global redistribution of tax will be.