Global corporate tax reform: what are the key issues in the G7 negotiations? | Tax evasion
G7 finance ministers are expected to agree on support for a global minimum corporate tax rate on Friday as part of talks in London between the wealthy group of countries.
The potential historic tax reform comes as governments around the world grapple with record levels of public borrowing incurred during the coronavirus pandemic.
On Wednesday, the United States focused on threatens to impose punitive tariffs on exports from the UK and five other countries in retaliation for recently imposed digital services taxes on US businesses. The Biden proposals aim to replace these unilateral moves by creating international agreements that capture the vast profits made by Apple and Microsoft in Europe and elsewhere.
Any deal would follow years of false starts in an attempt to ensure that multinationals and tech giants pay their fair share of taxes. The reforms would limit the way large companies can shift their profits to low-tax jurisdictions. Here are the details of 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 G7 support will generate 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.
In the first pillar, countries would obtain a new right to tax a share of the profits generated in their jurisdiction by a multinational with its headquarters abroad. This would mean taxing the source of a business’s income, such as sales of footwear 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 companies headquartered in their jurisdiction. The minimum rate would only apply to multinationals whose revenues exceed a certain threshold – whose specificities will be at the heart of the discussions. The tax would be paid to the country where the multinational’s parent company is based.
US President Joe Biden proposed a minimum rate of 21%, but Washington has since lowered that recommendation to 15% to gain other countries’ support for the reforms.
What companies would it applies to?
The Biden administration has proposed that around 100 multinationals fall under the first pillar. It has not published a list of such companies, nor the thresholds that should be applied to bring them within the scope, but tax experts estimate that around half of those affected are US companies, of which about eight digital companies.
Washington’s plans are likely to replace the OECD proposals presented last year, which included a revenue threshold of 750 million euros (£ 647 million), with criteria to restrict attention to ” automated digital services ”and“ consumer-oriented businesses ”, with a threshold profit margin of 10%. This would have captured around 2,300 multinationals.
The United States had previously opposed measures targeting digital businesses, 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 companies, according to tax experts.
Plans for a minimum global corporate tax rate under the second pillar would include up to 8,000 multinationals.
The EU Tax Observatory’s analysis indicates that companies that would be forced to pay more taxes would include oil giants BP, Shell, Iberdrola and Repsol, mining company Anglo American, telecommunications company BT and banks such as HSBC, Barclays and Santander.
How much would that bring in?
the The OECD estimated last October that up to $ 81 billion (£ 57 billion) in additional tax revenue each year would increase under the reforms. The first pillar would bring in between 5 and 12 billion dollars, while the second pillar, the world minimum rate, would bring in between 42 and 70 billion dollars.
However, this assumed that an overall minimum rate of 12.5% would be applied under the second pillar. It also includes a greater number of multinationals under the first pillar. The Tax Justice Network advocacy group believes that a A minimum rate of 21% would bring in 640 billion dollars in underpaid taxes.
There are various estimates of how much each country could recover. According to the Center for Economic Justice think tank of the Institute for Public Policy Research, the UK would reap an additional £ 14.7 billion a year from a global minimum rate of 21%.
Ireland could lose up to € 2 billion a year, according to its finance minister, Paschal Donohoe. The country, which levies a 12.5% corporate tax and has lower rates for profits on patents, demanded € 11.8 billion in corporate tax last year.
Could it be avoided?
Tax experts say avoidance would be difficult, especially if the changes are supported by a broad group of the world’s largest economies. With very few businesses likely to fall into the first pillar, the system would be easier to administer – but so it might not be so transformative.
In the second pillar, each country would collect the 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 meet the minimum rate.
If a company moved its head office 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 the rate. minimum.
What are the sticking points?
The scope of the new rules for deciding which companies are included, and the thresholds for determining what portion of profits are taxable, are key negotiating points.
Discussions will continue on where the minimum rate should be set. Some mid-sized economies have corporate tax rates below the minimum proposed by Washington – like Ireland at 12.5% and Hungary at 9%. However, tax experts believe a deal could still be struck because 15% is not a big increase.
In the UK there is concern about the limited scope of the first pillar. Ministers want America’s tech giants to pay a fair share of taxes based on the income they generate in Britain.
The UK and several other EU countries have introduced unilateral taxes on digital services to address this problem. The United States wants them scrapped if a multilateral deal is reached. However, the implementation of the new global rules could take years, meaning that the removal of taxes on digital services in some countries would be far from certain.
The plan for a minimum rate in the United States would also have to go through Congress, which is split 50-50 between Republicans and Democrats, making it harder for the Biden administration. However, tax experts believe that some form of minimum will be agreed.