G7 targets tax avoidance

Tom WickerMonday 19 July 2021

Frustration at the ability of multinational corporations to avoid substantial tax bills has been exacerbated by the digital economy and the pandemic. The US-driven agreement on a global minimum corporate tax rate is designed to address some of the issues, but can it succeed?

In early June, and with considerable fanfare, the finance ministers of the G7 richest nations agreed to endorse a global minimum corporate tax rate of at least 15 per cent. Their aim was to win support from the G20 – comprising 19 countries and the EU – at their meeting in July.

The creative ways multinational companies have dodged significant tax bills – ranging from headquartering in low-tax locations such as Ireland, to claiming hefty royalties on ‘intangible assets’ like intellectual property (IP) that are then routed to tax havens – have frustrated governments for years.

A global corporate tax rate would target overseas profits, to eliminate such tactics and to discourage countries from undercutting each other. Governments would still be able to set local corporate tax rates but could ‘top up’ the taxes of companies in their countries to compensate for lower-rate payments elsewhere. It’s an easy win, politically at least, after years of headlines decrying the offshore tax tactics of various multinational companies.

There are concerns about the impact of a minimum tax rate on jurisdictions whose economic health is argued to have depended on their attractive tax regimes. Ireland, for example, with its 12.5 per cent corporate tax rate, is the European base for Apple, Facebook and Google. On a per capita basis, professional services company EY reports that Ireland won the most foreign investment projects in Europe in 2019.

There’s also a bigger political picture. A global minimum tax rate is just one aspect of a two-pronged effort to tackle what is known as Base Erosion and Profit Shifting (BEPS). It builds on years of work and BEPS recommendations by the 38-state intergovernmental Organisation for Economic Co-operation and Development (OECD).

The OECD’s dual-pillar ‘inclusive framework’, known as Pillar One and Pillar Two, seeks to address the tax challenges presented by our digital age economy: how (and where) do you tax revenue from sales made without a physical office? For Ashley Greenbank, a corporate tax partner at London-headquartered firm Macfarlanes, the G7 announcement ‘confirms that the US seems to be getting its way’.

Taxing trade war

An inability on the part of EU Member States to agree a united approach to what Greenbank calls ‘the horrors of the digital economy’ in the context of the existing international tax framework has resulted in the implementation of bespoke digital services tax (DST) measures by different countries. This kicked off ‘something of a trade war’, says Joe Duffy, Webinar Officer of the IBA Taxes Committee and a tax partner at the Dublin-based law firm Matheson.

As home to one of the world’s largest concentrations of digital and technology companies, the industry-specific targeting of digital companies with market-based taxation (ie, where sales occur) has major implications for US business. No government wants to see more tax revenue flow into the coffers of another country.

As home to one of the world’s largest concentrations of digital and technology companies, the industry-specific targeting of digital companies […] has major implications for US business

In 2019, the Trump administration threatened France with tariffs on $2.4bn worth of exports in response to the country’s proposed three per cent digital tax. France ultimately delayed collection, but other European countries proceeded to implement their own DSTs.

Angering the US is a high-risk strategy – particularly if, like a post-Brexit UK, you’re seeking new trade relationships. The UK government’s webpage on its own DST tax pleads its commitment ‘to dis-applying [it] once an appropriate international solution is in place’.

This, says Duffy, is really what ‘kicked off the political demand to resolve these issues’, leading to the G7 agreement. ‘The driver is as much about untangling that trade war as anything else.’ Tellingly, the implementation of the OECD’s Pillar One framework would be coordinated with an effort to remove the DSTs. The US has proposed a ‘top-100’ company tax rate, but with few details so far.

The situation continues to evolve. At the start of July, the OECD/G20 issued a joint statement about its agreed two-pillar solution to the ‘digitalisation of the market’, with a detailed implementation plan to be finalised in October. In Pillar One’s ‘nexus’ rules, in-scope companies – multinationals with more than €20bn turnover – would see 20–30 per cent of residual profit (defined as over ten pent of revenue) allocated to market jurisdictions. The top-up tax of a global minimum rate is part of Pillar Two.

Talk of a ‘compensatory’ global corporate tax rate makes for neater headlines and is less contentious than cross-border digital services. It’s also a far easier sell than raising tax rates domestically. ‘You don’t want to be lowering taxes, you need to be putting them up’, Greenbank says. ‘But you can’t do that. It will make you uncompetitive and drive all business offshore.’

The fact that establishing a global rate has been a priority for President Biden has accelerated the process. However, in the US, instituting the 15 per cent would entail harmonising (ie, raising) the base rate of the country’s global intangible low-taxed income tax – a Trump-era reform that lowered the tax rate for US companies provided they brought offshore profits back.

Given how quickly political winds change, particularly with the US 2022 midterm elections on the horizon, there’s no guarantee that Biden would be able to get a deal through a re-aligned Congress. The result, says Greenbank, ‘might be that it never happens because the US administration can’t deliver on its side’.

There are likely to be many disagreements over the fine print, including what counts as a ‘parent company’

Besides, there are likely to be many disagreements over the fine print, including what counts as a ‘parent company’. Greenbank also sees potential disputes when one jurisdiction exercises its right to withhold topping up tax ‘because they’re interpreting the rules differently to another jurisdiction’. Others question how much the proposed framework will benefit poor countries or work with those outside the G7/G20.

For Duffy, the fanfare over the G7 agreement also belies the fact that many jurisdictions are already making changes based on the OECD’s BEPS actions. When it comes to Ireland, he points out that the infamous ‘Double Irish’ corporate tax tool is gone. His concern is about measures being implemented at the EU level where they aren’t globally, ‘because the EU has form of taking OECD recommendations and making them mandatory’.

One of the key benefits of a global minimum tax rate is that every country can implement it within their own laws. However, from likely ongoing tension between the US and an EU that still favours taxing the technology industry, to the inevitable carve-outs, opt-outs and other complexities, it’s far from straightforward. There’s a possibility this will all result in – in Greenbank’s words – ‘a very loose compromise’ that doesn’t fully satisfy anyone.

Tom Wicker is a freelance journalist and can be contacted at tomw@tomwicker.org

Header pic: Shutterstock.com/Funtap