The recent meeting between G7 group leaders has led to a proposal to reform the international tax system which “levels out the playing field.”
The G7 (Group of 7) members are currently the UK, US, Canada, France, Germany, Italy, and Japan. After their recent meeting, they have given proposals to tackle the issue of multi-national companies moving their headquarters to obscure locations to pay the lower tax rates offered in those countries.
Why are New Proposals Needed?
Whilst there has been a rapid surge in the enormity of technological firms, this has also highlighted the concern of differing tax rates around the world.
The tax upon the profits of a limited business is called corporation tax. This corporation tax can vary across the world and with limited companies primarily being driven by their profits, it is understandable that countries with lower corporation tax rates are more attractive to these businesses. Ireland, for example, has a lower corporation tax rate of 12.5%, compared to the UK’s 19% (set to rise to 25% in 2023), and thus this may be advantageous to firms setting their headquarters (HQ) in Ireland.
However, unlike firms in the secondary sector (i.e., manufacturing), technological firms are not limited to the infrastructure of a country. Therefore, businesses such as Google and AirBnB have had no qualms about setting their HQ in Ireland as most of their business is online, and the seclusion of Ireland does not pose substantial difficulties. These firms can still operate online in other countries, whilst retaining their HQ elsewhere. In fact, Facebookhighlighted this in 2018 as they paid just £28.5 million in tax to the UK, whilst its revenue was a whopping £1.65 billion. Most of which perhaps was claimed to its HQ in Ireland for its lower tax. A similar scenario was seen in the same year by Amazon who paid just £14.7 million to the UK, whilst claiming its revenue to be £2.3 billion. Thus, companies that do business in multiple countries can structure their company in a way to minimise their tax bills.
With the above in mind, it’s clear that corporation tax rates are competitive between countries to win over big firms such as Google, AirBnB and Amazon. Whilst it is perfectly legal for a firm to base their HQ in low tax rate countries, many governments think firms have a moral duty to pay the higher tax rates – especially given the seriousness of the recent pandemic. Additionally, a statement by the US Treasury described the competitiveness as a “race to the bottom” which “undermines the United States’ and other countries’ ability to raise the revenue needed to make critical investments.”
The first proposal for revising tax billing – known as “pillar 1” – would only apply to those firms with at least a 10% profit margin. If a firm is making a large profit margin, the first 10% will be taxed according to the country in which the revenue was made, and any remaining profit margin above the 10%, will be taxed at a standard rate of 20%.
This is about “changing which country gets to tax the companies” claimed Chris Sanger, the Head of Tax Policy at the accountancy firm EY.
The second proposal is to enforce a global minimum corporation tax rate of 15%. This is aimed at preventing countries undercutting each other’s tax rates to attract the big firms’ HQ, and is to be used in conjunction with the first proposal – “hand in hand” as described by Janet Yellen, the US Treasury Secretary.
In essence then, it seems that successful firms with a profit margin of over 10% will be susceptible to the following: they will have to pay at least 15% tax on their first 10% profit margin as this would be the minimum in whichever country they are in, and a standard 20% on any other profits after. The UK Chancellor, Rishi Sunak, claims this agreement would create “a fairer tax system fit for the 21st Century.”
Are these Proposals Fair?
An interesting question is whether these proposals are fair?
Regarding Proposal 2, the US Treasury has stated that the competitive undercutting of countries’ tax rates has hindered the United States’ and other countries’ ability to make critical investments. In a sense, they are losing out to other nations who offer a lower corporation tax rate. Indeed, the G7 have said that their proposal to reform the tax systems “levels the playing field.” However, as Gabriela Bucher – the Executive Director of Oxfam – described, the proposals are to benefit the G7 at the expense of poorer nations. By enforcing a minimum corporation tax rate of 15%, the tax advantage of poorer countries that initially attracted the HQ of big firms would cease to exist. The level playing field described by the G7 seems to be levelling the tax rate field in their favour, whilst the differences in infrastructure, economy, and wealth between the G7 and poorer nations seems to be overlooked. Perhaps the lower corporation tax in these poorer countries is the fighting chance that they have to attract big firms, compared to the powerful G7 nations. For example, Hungary offers a 9% tax rate, Andorra and Macedonia at 10%, and Moldova at 12%.
If the lack of big firms’ tax payments is hindering the US’ ability to make critical investments, then the poorer nations who use low corporation tax rates as their fighting chance to attract big firms will surely lose out immensely. Their fighting chance will be eradicated and the poorer nations themselves will not be able to make their critical investmentsneither – the nations who arguably need it more. Alex Cobham, the Chief Executive of the Tax Justice Network, admitted the proposal was a “turning point” but confirmed it remained “extremely unfair.”
However, with regard to Proposal 1, a conflicting view of the above, could be taken. Firms often shift their profits from the nation in which the revenue was made, back to their HQ to pay the lower tax rates. Apple, for example, has an active market in poorer nations and Proposal 1 would mean that 10% of the profits made in these nations would indeed return to them via tax, instead of being transferred and paid to the nation hosting the firm’s HQ. Thus, whilst the proposals would act detrimentally to tax haven nations, the proposals would also ensure that taxes are indeed being collected in other nations too.
In conclusion, the proposals by the G7 would only come into force if it were agreed by the majority of nations. With the proposals seemingly unfair to the nations that are benefiting from the current system, it seems likely that they will be reluctant to agree. However, Ireland, being one of those benefiting nations, has been told by the German Finance Minister, Olaf Scholz, to “get on the train.”
There is perhaps a shared opinion that the big technological companies should have a moral duty to pay the higher tax rates, seeing as though they are not bound by infrastructure and especially considering the damage of the pandemic. But are these firms really under a moral duty? It may seem that perhaps these firms are being targeted as they have not only survived the pandemic – as did the likes of other big firms such as Tesco – , but these firms have also benefited from the pandemic too given the massive shunt towards the use of technology post-pandemic. Amazon for example, does not meet the 10% threshold for the first proposal and thus should remain unaffected. However, the US Treasury Secretary, Janet Yellen, said Amazon – as well as Facebook – “would qualify by almost any definition”, thus, being targeted. These firms are acting perfectly legally by setting their HQ in lower tax rate countries. Have they merely been savvy in infiltrating a market safe from the limits of infrastructure and a pandemic, unlike the hospitality sector which has seen devastation?
That being said, the big firms have indeed been welcoming to the G7’s proposals, with Facebook’s Vice President Nick Clegg wanting the “international tax reform process to succeed.” A spokesperson for Amazon described the proposals as a “step forward [in bringing] stability to the international tax system”, as well as a spokesperson for Google stating they “strongly support the work being done.”
With the proposals only between the G7 for now, there will be a clearer outcome following the analysis during the G20 meeting later in July, which includes the likes of Brazil, China, and India. Chris Sanger, the Head of Tax Policy for EY says that if the largest countries sign up for the tax changes, then it may “build momentum to get many more to follow suit.”
We must await the further discussions of the G20 meeting.