Can the world’s biggest countries take on the world’s biggest companies and win?
It is still an open question even after the big G-7 nations reached a breakthrough agreement in London to back a global minimum corporate tax rate of 15%.
At its best, the agreement could lead to hundreds of billions of dollars flowing from the likes of Google, Apple and Amazon into the tax bases of all of the countries the global giants now operate in.
However, there are lots of hurdles still to navigate given that the giant multinationals have been siphoning profits through very low tax countries for decades now.
That won’t be changing in the foreseeable future given that this G-7 deal now heads to find broader agreement at a meeting of the G20 — which includes a number of emerging economies — due to take place next month in Venice.
Then it would go before the July meeting of the expanded G20 finance ministers’ group, which will be aiming for a consensus agreement.
The deal also feeds into years of work put in by The Organization for Economic Cooperation and Development (OECD) which has been coordinating tax negotiations among 140 countries for taxing cross-border digital services and curbing tax-base erosion, including a global corporate minimum tax.
Big announcement but big enforcement job remains
“I’m delighted to announce that G7 finance ministers … have reached a historic agreement to reform the global tax system,” said British finance minister Rishi Sunak, who chaired the two days of talks which were attended by his finance counterparts from Canada, France, Germany, Italy, Japan and the United States.
Sunak said the G7 had agreed to make the global tax system “fit for the global digital age and crucially to make sure that it’s fair so that the right companies pay the right tax in the right places”.
He also said that the deal was of “historic significance” and “finally brings our global tax system into the 21st century”.
US Treasury Secretary Janet Yellen said the “significant, unprecedented commitment” would end what she called a race to the bottom on global taxation.
Through not involved in the talks, Australia’s Treasurer Josh Frydenberg said: “Australia welcomes the commitment from G7 nations to agree a globally consistent approach to the tax challenges posed by the digitalisation of the economy.
“Australia will remain an active and constructive participant in these OECD-led discussions as we have done so throughout,’’ he said.
Two main areas covered by the agreement
In broad terms the G7 agreement covers two main areas.
The first part lets countries tax a share of the profits earned by companies that have no physical presence in that country but have substantial sales, for instance through selling digital advertising.
The other main part of the proposal is for countries to tax their home companies’ overseas profits at a rate of at least 15%.
In theory, that would deter the practice of using accounting schemes to shift profits to a few very low-tax countries because earnings untaxed overseas would face a top-up tax in the headquarters country.
However, there is a long way to go before any tax enforcement moves actually begin.
Will smaller countries and tax havens co-operate?
One of the problems is getting the co-operation of the many smaller countries that currently collect very low taxes from the multinationals – with Ireland a case in point.
Ireland has long boasted an attractive 12.5% tax rate for foreign multinationals, which has attracted many jobs and lots of tax revenue to the country.
Coincidentally, the Irish finance Minister, Paschal Donohoe, attended the weekend G-7 meeting in his role as president of the euro zone’s grouping of finance ministers and he stressed that companies like Apple had been in Ireland for decades and were among its largest employers.
He said multinationals were “well embedded in terms of the physical infrastructure of our country” due to the longevity of their investments and the fact that Ireland has been clear about how it will respond to change and remain a predictable destination for foreign companies.
Ireland’s corporate taxes to fall 20%
Mr Donohoe predicted that Ireland’s annual corporate tax take is set to fall by around 20% or $3.1 billion than it otherwise would have been by 2025, due to the anticipated changes.
However, Ireland is just one of many low-tax homes for multinational and it remains uncertain how the new rules would work if some of these tax havens decided not to co-operate with the measures.
It is one thing to say come to an agreement on a 15% tax rate but quite another to enforce it, particularly if countries don’t have transparency about what tax they are charging.
Enforcement an issue and is 15% too low?
There has also been early criticism with global poverty campaign group Oxfam slamming the deal as inadequate.
“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,’’ the group said.
“They are setting the bar so low that companies can just step over it.”
“Stopping the explosion in inequality caused by COVID-19 and tackling the climate crisis will be impossible if corporations continue to pay virtually no tax …. This is not a fair deal.” Said Oxfam.
Setting the rate at 15% could also pose problems for countries such as Australia which still has a 30% corporate tax rate – albeit with a range of deductions that can lower that headline rate.
If the Googles and Facebooks of the world face a tax rise that heads towards 15%, how would it feel to be running a much smaller competitor in Australia with a headline tax rate that was double that?