Tech giants and tax havens targeted by G7 deal

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    G7 (Group of seven)  is one of the prominent summits held by the advanced and wealthiest countries to align with the global issues they face economically, socially, and politically. Recently,  A 3-day summit was hosted by the United Kingdom under the leadership of Boris Johnson at Cornwall, England, between 11 to 13 June 2021. Although it took place between the seven-member countries: the UK, Canada, France, Germany, Italy, Japan, and the USA, the European Council & European Union, Australia, India and South Korea were also a part of it as guests.

    The summit, is something that is looked forward to in general but still gained a lot more momentum when the plan revolved around the sensitive domain of taxes to be paid by multinationals in the years to come. So to get more insights into it, let’s get ahead with details.

    We will cover the following topics in this blog post.

    Key highlights of G7 Summit
    G7 Tax deal
    Tax reform decoded
    Companies affected by the decision
    Why is global minimum tax needed?
    What was the UK’s tax regime for multinationals?
    Why are Tech companies accused?
    Decision about digital taxes
    Response of tech giants and finance ministers to the tax reforms
    The road ahead

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    Key highlights of G7 Summit

    • COVID-19 Vaccines: An additional 870 million COVID-19 vaccines for developing nations, apart from those already promised by the UK and the US.
    • Climate change:
      • Resorting to more miniature new coal-burning plants. In addition, funding developing nations to help a smooth transition to a cleaner fuel ecosystem.
      • A Global Green Revolution would be the topmost priority till 2030. The USA directly hinted at its comeback after the Joe Biden Election.
    • Corporation tax: A 15% corporate tax rate for multinational companies to stop using tax havens.

    G7 Tax deal

    The summit came up with a firm stand for tax-paying organisations, and it was not a surprise. The UK Treasury department said that

    it’s time that big international companies start paying a fair share.

    According to Chancellor of  The UK Rishi Sunak, the tax rate reform is categorised as historic because the right companies would pay the correct taxes at the right places.

    The fundamental reforms that were agreed upon are:

    • Multinationals now are expected to pay tax at the location where they do business.
    • The firms that earn more than 10% profit margins on their sales will be taxed globally and will have to reallocate their profit to 20% of that margin amount above 10%.
    • The reallocation would be taxed in countries where the company made sales.
    • The minimum corporate tax rate of 15% is created for countries that operate on a large scale, and it will be payable to the government of operation.
    • Climate reporting is also marked as mandatory, indicating a strict reporting of the organisation’s activities and responsibilities towards the environment at large.

    Tax reform decoded

    The deal has primarily two aspects.

    First, multinational corporations will now have to pay more tax at places where they sell products and services. The company will be taxable everywhere they cross the 10% limit on sales.

    Secondly, the minimum tax rate of 15% in every country a company operates. So it will stop getting into the race of offering lower tax rates.

    For instance, Ireland offers a tax rate of 12.5% in response to 19% of the UK, which will stand at 25% in 2023.

    Companies affected by the decision

    The first aspect of tax reform would impact close to 100 multinationals, while the second aspect dealing with a minimum tax rate would be more widespread.

    It will cover approximately 8,000 multinationals globally, including BP, Shell, Amazon, Facebook, HSBC, Barclays and Anglo American.

    Why is global minimum tax needed?

    The issue faced by local governments was that the corporate earnings continue to migrate to different countries, usually the tax havens.

    What are tax havens?

    Tax havens are offshore countries that offer foreign individuals and businesses minimal or no tax liability in a stable environment in return for job creation and other factors.

    Companies can lower their taxes as they get to pay fewer taxes, including minimal reporting and lack of transparency.

    Prominent countries in this list are The Cayman Islands, The Channel Islands, Mauritius, Monaco, Panama, The Bahamas, Bermuda and Andorra.

    Many digital companies are making money in multiple locations but end up paying taxes only at their headquarters. This is because earlier countries deliberately offer lower corporate tax rates to attract foreign investments. Tech companies, unlike other heavy industry, get to benefit.

    This arrangement is legally acceptable, but now the world is trying to cope with a pandemic. Businesses can contribute to such an international crisis by generating more revenue for the countries.

    This has been talked about for decades now; however, this decision is the first attempt in this direction. It will help governments cope with their turbulent financial position by getting much-needed cash inflow.

    What was the UK’s tax regime for multinationals?

    Before historic reform; The UK taxed its businesses under two classifications: resident and non-resident companies, at 19%.

    Resident companiesTaxable in the UK on worldwide income
    Non-resident companiesTaxable only for the trading profits generated out of a UK permanent establishment

    Why are Tech companies accused?

    The technology sector primarily is driven by six major US players, and surprisingly, all six of them have made it to the list of avoiding taxes over the past decade.

    Reports claim that the giant tech companies, namely; Amazon, Facebook, Netflix, Apple, Alphabet and Microsoft, have managed to pay $96 billion less tax between the year 2011-2020.

    Amazon & Facebook are the most discussed ones, and the description regarding this decade’s tax payments is given in the table below:

    silicon sex report

     This was just because they were able to relocate their income to less taxable locations artificially. This profit shifting mechanism is causing billions to countries. The companies either declined or were not ready to respond as legally, they are not doing any wrong.

    Also, tech companies pay a lower percentage of taxes in locations outside the USA.

    Tech companies taxes

    Decision about digital taxes

    Digital taxes is concerned with companies that have no physical presence and are primarily internet-based. Their taxation also came up as a significant issue in front of G 7 countries.

    Various nations impose a digital services tax (DST), but it will stand eliminated once the multilateral deal is finalised.

    Digital service taxes

    Although the US president proposed a solution to this problem, a list must be made of the 100 of the world’s biggest and profitable companies irrespective of their business domain. The countries can then tax companies based on their local sales.

    Response of tech giants and finance ministers to the tax reforms

    The tax reforms received a widespread response from finance ministers and tech giant companies.

    Some of them are described below:

    Amazon marks it as a welcome step forward and is looking towards G20 for further discussions.

    Facebook’s VP for global affairs, Nick Clegg, also quoted a “significant first step towards certainty for businesses and strengthening public confidence in the global tax system”.

    The German Finance minister also stated that the decision taken by the seven most essential nations would bring tax justice and solidarity all across the world.

    The road ahead

    The G7 summit is only an initiation as the tax reforms were only agreed upon by the seven advanced countries. However, other major nations were put forward their points in the coming G20 finance ministers meeting in July.

    In totality, the deal would take a significant time to get its final shape.

    An important question here could be the probability of avoidance attached to the decision. Can this decision be avoided, or Will the countries like Ireland, Hungary, and Cyprus accept the reforms?

    The answer is simple:

    • The reforms cannot be avoided as proposed by the unified effort of the seven most commanding nations of the globe.
    • This unanimous decision will be a solid force to finalise the agreement in the G20 meeting ahead.
    • Low tax economies will not isolate themselves from the powerful driving nation, leading to an agreement to the tax reform.

    Many countries will also benefit from this arrangement, like India, where the tax rates for foreign companies are already above the limit of 15%, turning it to be a feasible investment option. When the tax havens become unattractive, many countries could attract significant investment.

    Additionally, they will get an opportunity to tax the companies that operate without a physical presence, indicating a direct benefit in the forms of revenue.

    Taxes are a significant source of revenue for any country, especially at a sensitive phase where the battle is still is going on.

    Factually, 60% of global net wealth and close to 46% of GDP is in the hands of G7 nations. Therefore, decisions like these are not surprising. Moreover, reforms like these will help countries focus on the next decade’s growth in sync with getting through a major pandemic. Image credit internationalrelationsedu.

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