Taxing Big Tech: G7 cracks down on Big Tech tax avoidance
June 24, 2021
3 min read
What's going on here?
The G7 has reached a landmark agreement that will seek to prevent tax avoidance by tech companies.
What does this mean?
Global tech companies such as Google and Facebook are among the largest and most profitable in the world, and yet they have famously managed to avoid corporate tax for decades. This is largely because today’s global tax rules, devised in the 1920s, are unfit to deal with the multinational and digital nature of their operations.
The finance ministers of the G7 (a group of seven of the world’s richest nations: the UK, the US, Canada, France, Germany, Italy and Japan) have devised a two-pillar strategy to combat corporate tax avoidance. Under Pillar One, multinationals with profit margins of more than 10% will be taxed in the countries where they make sales, and not just where they are headquartered. This will prevent the largest global companies from minimising their tax obligations by setting up headquarters in low-tax jurisdictions and declaring profits there.
Pillar Two sets a global minimum corporate tax rate of at least 15%. This will seek to end the “race to the bottom” whereby countries undercut each other’s tax rates in order to lure businesses.
What's the big picture effect?
The G7 agreement could raise billions in tax revenue to help fund post-pandemic economic recovery, narrow the advantage held by multinationals over smaller companies, and ensure that corporations pay their fair share of tax. However, there are several kinks to be ironed out so that it can achieve these aims.
Due to its 10% profit margin threshold, it is estimated that Pillar One will only apply to around 100 companies, excluding some of the largest in the world. In 2020, an Amazon subsidiary based in Luxembourg paid no tax on €44bn of sales revenue, making Amazon one of the most prominent culprits of corporate tax avoidance. That year, Amazon had a market value of $1.6tn and sales of $386bn, but a profit margin of only 6.3% due to heavy reinvestment. If the new regime doesn’t take companies’ business models into account, it risks providing a loophole for corporations like Amazon to continue avoiding tax.
Moreover, the agreed 15% minimum corporate tax rate is fairly low. It is significantly lower than the 21% mooted by the Biden administration, and closer to that imposed by tax havens such as Switzerland (14.9%), Ireland and Cyprus (both 12.5%). This could undermine the aim of the reform by continuing to allow multinationals to declare their profits in low-tax countries. Crucially however, the “at least” included in Pillar Two creates potential to raise the minimum rate in subsequent negotiations.
Despite being relatively low, the minimum corporate tax rate threatens to stall developing countries’ economic growth by inhibiting their ability to attract foreign investment. In poorer investment environments, lower tax rates are one of the few ways in which governments can compensate companies for the disadvantages they face. Developing countries such as Moldova (12%), Paraguay (10%), and Uzbekistan (7.5%) have low corporate tax rates in order to attract investment and create jobs.
The effectiveness of the reform will depend on the fine print of ongoing negotiations. The agreement is set to be discussed at a meeting of the wider G20 group in July, and then by the Organisation for Economic Co-operation and Development (OECD). The current model is imperfect, but it is a promising step towards creating a fairer global tax system that is fit for the 21st century.
Report written by Isobel Deane
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