The maybe fair tax deal

It was claimed (by those who negotiated it) to be not just “historic” but “seismic”. But the G7 tax deal may turn out to have been rather lower on the Richter scale of seismic activity than the politicians and the excited media coverage may have implied. 

If you believe the formal announcements, the G7 agreement on tax is all about fairness:

  • Italy’s prime minister Mario Draghi called it a “historic step towards a fairer and more equitable society for our citizens”
  • Rishi Sunak, UK chancellor of the exchequer, said the deal would require “the largest multinational tech giants to pay their fair share of tax in the UK”
  • US treasury secretary, Janet Yellen, said the agreement would “ensure fairness for the middle class and working people in the US and around the world”

During Fair Tax Week, such comments in themselves may be encouraging. But whether the deal lives up to the promise of fairness is somewhat doubtful.

The deal comes in two parts. Pillar 1, applying to the largest 100 multinationals with profit margins greater than 10%, would allow 20% taxation of profits above this 10% threshold to be taxed in the country of operation. Pillar 2 would set a global minimum tax rate of 15%. Pillar 1 is about taxing new economy businesses and the US government was apparently arguing that European nations’ digital tax regimes should be abandoned the moment the G7 agreement was reached. Pillar 2 is aimed at eliminating a race to the bottom in corporate tax rates whereby countries welcome activity (or just brass plate operations) on the basis of low tax regimes. 

There are already doubts about whether the deal will last at all. Caroline Lucas MP at a Fair Tax Week event talked about the deal “already being watered down” as we see noise about the UK government seeking exemption for financial services from the scope of the regime. Other countries are reportedly in discussion with their own national champions and considering what the impacts may be.

In any case, the G7 ‘deal’ is in effect nothing more than a proposal to be considered by the rest of the world. There is an ongoing OECD and G20 process on tax and this G7 deal is an attempt to make progress in those discussions, an offer made to the broader group. Whether the other nations in the process will welcome it – and whether it will be seen by them to be fair – seems very much in doubt. The G24, the forum for developing economies seeking to influence the world’s economic institutions (and which includes six of the G20 nations), was blunt in its assessment of the approach: “G-24 is of view that the proposed scope of the Pillar 1 limited to top 100 MNEs will result in smaller distributable residual profit available for market developing countries”. They do not seem any more keen on the Pillar 2 aspects. 

But the G7 deal may fail even on its own terms. One of the low-taxed companies that is most often mentioned in European circles as evidence of the need for tax reform is Amazon. It appears to have been deliberately targeted in the French and UK digital taxes. Yet under the G7 agreement, Amazon would be unaffected because its margin – though it has increased steadily in recent years – remains below 6.5%, well beneath the 10% threshold. Amazon thus might face less tax outside the US under the G7 deal than it does at present.

And that 10% profit margin threshold also appears to invite structuring to reduce profits. Most obvious of these would be leverage, removing cashflows from the taxable base by switching them from profits to debt repayments. What is within the taxable base will remain a vital consideration – in this Pillar and also in Pillar 2, where the key question (alongside whether 15% is a fair level of tax) is to what tax base will that 15% rate be applied. Without more clarity on this, the 15% rate is largely meaningless.

As ever with tax, the devil is in the detail. At present, there is simply no detail in what the G7 have announced.

There appear to be as many questions as answers from this G7 ‘deal’. Whether it will amount to a fair proposal frankly seems very much in doubt.

See also: Taxing gains, closing loopholes

Simplifying tax is fairness

Talking with the taxman about fairness

Fair tax reflections from investors (II)

Fair tax reflections from investors

G7 Finance Ministers & Central Bank Governors Communiqué, June 5 2021

Fair Tax Week 2021

Climate and Tax Justice: Time to Act? June 10 2021

Comments of the G-24 on the Pillar One and Pillar Two proposals being discussed by OECD/G20 Inclusive Framework on BEPS, May 17 2021

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