What is the G7 tax deal and how did it come about?
A landmark tax deal was reached at a summit attended by the United States, Britain and other sizeable, wealthy nations who compose the G7 (Group of Seven – The G7 includes the United States, Japan, Germany, Britain, France, Italy and Canada). The summit was held in Cornwall in the United Kingdom earlier this month. The objective of the deal was to make multinational businesses such as Facebook, Amazon and Google pay more tax.
For years, affluent nations have been struggling with how to best discourage large multinational companies from legally shifting profits to low-tax, offshore havens which enable those entities to avoid paying higher taxes.
Ireland, with a low corporate tax rate of 12.5%, has successfully strategized to attract large US technology companies to headquarter themselves in their welcoming jurisdiction.
The Biden administration injected fresh momentum into the stalled talks by recommending a minimum global tax rate of 15% on corporate profits which is beneath the lowest current level in the G7.
In addition to a minimum global tax rate, the deal will enable countries to fairly tax companies that are not headquartered in their jurisdiction but make considerable profits for example from selling digital advertising. The G7 deal would see companies, whether they sell digital services or not, being taxed in any jurisdiction where they make greater than 10% profit on sales, potentially at a rate of 20% or more.
The deal is said to be a ‘Game changer’ as hundreds of billions of dollars could be raised to help governments recover financially from the aftermath of the covid-19 pandemic.
During the G7 summit it was revealed that no corporate tax was paid on $315bn in profit made in 2020 by an Irish subsidiary of Microsoft.
Why is a global deal needed?
Corporate tax regulations vary substantially from country to country and some international tax rules harken from the 1920s. As such, they struggle to deal adequately with the relatively recent upsurge in growth of multinational technology companies such as Google, Amazon and Facebook, particularly when these firms assign the greater part of their annual profits to intellectual property retained in locations that are commonly known as tax havens.
Currently individual jurisdictions find it challenging to tackle this issue as technology companies are highly mobile and will, when pressed, relocate to countries with more favourable tax regulations.
The status quo has been described as a “race-to-the-bottom” in terms of international corporate tax rates by U.S. Treasury Secretary Janet Yellen.
While this behaviour is legal, many governments contend that big business has an ethical obligation to pay more tax, particularly subsequent to a global crisis such as the pandemic which has entailed massive recovery spending in some countries.
Will the tax deal work?
The deal brokered at the recent G7 summit is the first time an attempt has been made by multiple nations working in concord to address the issue. Without doubt, the agreement reached earlier this month between the G7 is a key step forward however, it is only a deal brokered between 7 of the world’s most advanced economies. China, Russia and 139 other countries will scrutinise the agreement in July at the G20 meeting to be held in Paris, so the deal is far from globally accepted at this time.
Also, substantial elements of the deal are yet to be established such as which multinational companies will be targeted and what specific tax amendments will be actioned.
With this said, Yellen (US Treasury Secretary), who attended meetings in London stated that the accord reached by the G7 “provides tremendous momentum” on the road to attaining a global agreement.
Chris Sanger, head of tax policy at accountancy firm EY said that further impetus may be garnered for the deal… if the largest countries come on board, then “many more may follow suit”.
The issue of the digital services taxes imposed by the UK, France and Italy also needs to be addressed and the sooner the better. A request has been made by the US that these countries eliminate digital services taxes as part of the deal as not doing so could result in tech giants paying lower not higher taxes.
The UK has said that if it is provided with assertions that giant tech companies will not be allowed to get off scot-free then it is willing to abandon its digital services tax.
The eyes of the world are now on the G20 meeting to be held in Rome in October. Doubtless two of the biggest questions at hand from an economic perspective are, is the proposed 15% minimum tax rate high enough to make a difference and is there sufficient momentum for the agreement forged by the G7 to become a truly global accord?