Image source,EPA
Yellen called this a historic agreement.
The United States, the United Kingdom, France, Germany, Canada, Italy and Japan, the Group of Seven (G7) and the European Union announced on Saturday that they have reached a “historic” tax agreement. According to the agreement, countries will uniformly implement a tax rate of at least 15% on multinational companies operating and conducting business in their own countries.
This measure is expected to help governments in debt distress due to the new crown epidemic cope with the crisis, and at the same time help solve the long-standing problem of tax avoidance by large multinational companies.
U.S. Treasury Secretary Yellen said: “This is very complicated. Negotiations have lasted for 8 years and were once blocked when Trump was in power. I regard this as history, showing that transnational cooperation can be successful.”
International technology companies such as Microsoft, Facebook, and Google are expected to be affected. However, some advocacy groups believe that this tax rate is low and cannot prevent tax havens from functioning.
1. Why is there such an agreement?
Taxation is a manifestation of the sovereignty of each country. It has always been very difficult for multiple countries to reach a common taxation agreement.
Some large technology companies have been setting up branches in some low-tax countries and remitting most of their profits from all over the world to these low-tax countries to ensure that they pay lower taxes.
Image source,PA Media
The finance ministers of the G7 countries reached this agreement in London.
This practice is legal, but it has been criticized.
For example, in 2018, Facebook only had to pay a tax of 28.5 million pounds under the record-breaking British profit of 1.65 billion pounds, which caused dissatisfaction with the local government and public opinion. In April last year, the United Kingdom passed a digital marketing tax to force technology companies to pay taxes based on their local income, without calculating whether they will transfer their profits to low-tax countries. The French government also quarreled with Facebook over taxation issues, and finally Facebook agreed to pay a tax of 106 million euros to France.
Large companies are not only avoiding taxes in developed countries with high tax rates. The British non-governmental organization ActionAid stated in October last year that large companies such as Facebook, Google, and Microsoft have avoided taxation of at least US$2.8 billion in many developing countries, which is enough to hire 700,000 nurses in 20 countries around the world to help fight the epidemic.
The framework of the new agreement will require them to pay taxes wherever they provide services and products, not limited to countries where profits are settled.
A uniform minimum tax rate can also prevent countries from competing with each other at low tax rates. Take the UK as an example. The UK corporate tax is set at 19%, and it is expected to increase to 25% in 2023 in response to the epidemic; while in Ireland, the tax rate is only 12.5%.
After the agreement is implemented, the taxation of technology companies in the United Kingdom, Ireland and European countries will be replaced by the new 15% tax rate.
Image source,Getty Images
Companies such as Facebook and Google will be affected by the new tax system.
2. Which companies are affected?
However, the specific implementation of the agreement still needs to be negotiated by various countries and has to be passed by the legislature of each country.
The measures announced on Saturday are only one direction. According to the G7 agreement, this tax clause can be applied to the “largest and most profitable companies” with a net profit margin of at least 10%. If the profit is higher than this figure, Each country also has the right to tax 20% of the excess.
But specifically, there is no clear definition of which are the “largest and most profitable companies.” That is, it is not known how many companies are included. It is estimated that Microsoft, Facebook, Google, etc. will necessarily be included.
But some large companies with low net profit margins may have avoided taxation.
For example, Amazon’s net profit margin in 2020 is only 6.3%. It has been raising costs to invest to expand its market share. It may not be restricted by the new agreement. However, U.S. Treasury Secretary Yellen was asked whether Amazon will be included in this time, and said that he believes that the agreement will include all large and profitable companies, which will almost meet its definition.
Image source,Reuters
The Swiss Ministry of Finance issued a statement on Monday, stating that Switzerland will continue to take necessary measures to ensure that it continues to be a highly attractive place for the business community, which seems to imply that it may not participate in collective tax rate policies of European and American countries.
3. Will other countries follow?
Regarding taxation arrangements, there is no final decision on whether there will be differences among countries.
Some of the smaller countries that used to have the advantage of low tax rates hope to have greater autonomy to maintain their competitiveness. Among them, Ireland, which has a lower tax rate, indicated that when discussing agreements, it depends on the development and size of the country, and hopes to strive for more recognizable tax competition.
Officials in some countries have proposed that the 15% tax rate is just a basis, and there is still room for negotiation to increase it. For example, the United States is striving to increase this figure to 21%.
Oxfam in the United Kingdom believes that the 15% tax rate is too low to make a big difference, and it has failed to prevent the operation of tax havens.
“This is ridiculous. G7 claims to set the world‘s lowest corporate tax rate to completely repair the broken global tax system. The tax rates set are actually the soft tax rates in tax havens such as Ireland, Switzerland, and Singapore,” Oxfam Executive Director Gabriela Butcher ( Gabriela Bucher) said: “They set the threshold so low, these companies can easily cross over.”
She pointed out that the agreement is not fair, but only beneficial to G7, where most large companies are headquartered, but at the expense of the interests of poor countries.
Alex Cobham, chief executive of the Tax Justice Network, said the agreement was a turning point, but it was still “extremely unfair.”
He told the BBC: “We have taken the first step today and put forward the idea of a minimum tax rate, but what we need is to ensure that the profits and profits of the enterprise are evenly distributed to all parts of the world.”
The other biggest issue with the agreement is how many countries it includes. The current agreement is limited to the G7 and the European Union. The focus of the outside world is on the G20 finance ministers meeting held in Venice in July this year. It is expected that this tax system will be discussed at that time.
Whether China, Russia, Brazil, and other countries will follow suit will determine the effectiveness of the tariff system.
The Swiss Ministry of Finance, which is known for its low tax rates, issued a statement on Monday stating that Switzerland will continue to take necessary measures to ensure that it continues to be a highly attractive place for the business community, which seems to imply that it may not participate in the tax rate policy collectively drafted by European and American countries.
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4. What is the response of the company?
Nick Clegg, vice chairman of Facebook’s international affairs, said: “We hope that the progress of international tax reform will be successful, and acknowledge that this means that Facebook will pay more taxes in different places.”
An Amazon spokesperson said that the agreement is to further stabilize the international tax system. A Google spokesperson said that he strongly supports the update of international tax regulations and hopes that countries will cooperate to ensure that the agreement is feasible and balanced.
Internet companies have been pressured by European and American governments for many years to require them to pay more taxes. They have long been prepared for such policies.
They were relatively cautious and positive in responding to the new agreement between the G7 and the European Union. Analyses and predicts that the 15% tax rate is a controllable and affordable range for them.