Corporate Tax

Evaluation: G7 international tax plan may hit corporate giants erratically

A wealthy nation’s agreement to squeeze more taxes out of large multinationals could hit some companies hard while others – including some of the most common legislative wrath targets – remain relatively unscathed, according to a Reuters analysis.

The Treasury Ministers of the Group of Seven Leading Nations agreed on proposals on Saturday to ensure that companies pay taxes in every country in which they operate, rather than shifting profits to low-tax havens elsewhere.

One proposed measure would allow countries where customers are located to tax a larger proportion of the profits of a multinational company above a certain threshold. Ministers also agreed on a second proposal that would impose a minimum tax rate of 15% on profits in each overseas country where companies operate, regardless of profit margin.

Reuters review of Google owner Alphabet Inc’s corporate filings suggests the company will increase its taxes by less than $ 600 million in 2020, or about 7% more than its global tax bill of $ 7.8 billion. Dollars could increase if both of the proposed measures were applied. Google is one of the companies that has been criticized by some legislators for paying too little taxes.

Meanwhile, U.S.-based medical giant Johnson & Johnson could add $ 1 billion to its tax bill, a more than 50% increase from its global tax spending of 1.78 billion, according to Reuters calculations Means US dollar last year.

Both Google and J&J declined to comment on the calculations.

In a statement on Saturday following the G7 agreement, Google spokesman José Castañeda said: “We strongly support the work that is being done to update international tax rules. We hope that countries will continue to work together to ensure a balanced and balanced tax regime soon permanent agreement is concluded. “

It’s difficult to determine the exact impact the new regulations will have on businesses, in part because businesses don’t typically disclose their income and tax payments by country. And important details about the implementation of the rules are still pending, say tax experts, including which countries the profits would be reallocated and to what extent the taxes generated by the new measures would offset the taxes owed under the current system.

The proposed rules themselves also encounter obstacles. In the United States, several top Republican politicians have spoken out against the agreement. Details of the agreement are also expected to be discussed by the broader group of 20 countries next month.

Four tax experts agreed with Reuters’ methodology but noted that there is still uncertainty about how the measures would be applied, including the tax breaks included in the minimum 15% overseas tax.

The G7 includes Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

“The deal ensures that the system is fair so that the right companies pay the right taxes in the right places,” said a UK Treasury spokesman who hosted the G7 meeting. “The final design details and parameters of the rules still have to be worked through.”

SHARE PROFITS

The first proposed measure focuses on large global companies that have a profit margin of at least 10% worldwide. Countries in which the companies operate would have the right to tax 20% of global profits above this threshold in order to prevent companies from reporting profits in tax havens where they do little business.

Applying this formula to Google could result in additional taxes of up to $ 540 million, according to Reuters analysis.

Based on Google’s global profits of $ 48 billion in 2020, Reuters calculated what portion of that revenue could be reallocated based on the proposed G7 formula. Reuters then calculated how much more the company would pay if that portion of income were taxed at 23% – this is the average developed nation tax rate as determined by the Organization for Economic Cooperation and Development’s Paris research facility – not the average 14% foreign tax rate that Google paid last year.

Applying the same methodology to J&J and its global 2020 profits of $ 16.5 billion, the healthcare company would increase its global tax burden by approximately $ 270 million as a result of the first move.

The exact impact on any company’s tax bill would depend on how much income is actually reallocated. It is also controversial from which country and to which country the profit will be relocated – and thus the increase in the tax rate. If all of the reallocated profit comes from tax-exempt countries, the impact could be greater.

MINIMUM TAX ABROAD

Officials from the US and UK say the other measure, which includes a minimum global tax of 15%, will have a bigger impact on the amount of taxes that governments levy. However, the impact on companies will be very different. In recent years, Google parent Alphabet, like some other tax activist targets, has reorganized its international tax structures and earned over three-quarters of its global income in the United States last year, compared with less than half in the previous three years Years after his company registrations.

Google last year reported $ 10.5 billion in revenue outside the US and an average overseas tax rate of 14%, one percentage point below the proposed G7 minimum tax.

If all of Google’s overseas revenue were taxed 15%, the additional tax would be $ 100 million. The impact could be greater if a large chunk of the money is made in tax-free countries like Bermuda, where Google used to have revenues of over $ 10 billion a year. Conversely, if the first move induced Google to redistribute some of its non-US revenue from tax havens, the impact of the minimum tax would be reduced.

Without the impact of the first proposed measure, increasing the tax rate on foreign income to 15% would add an additional $ 45 million in taxes.

The situation for J&J would be completely different. It generated 76% of its 2020 income outside of the United States and paid an average of 7% tax on that overseas profit. Applying a 15% tax rate to this foreign income would result in additional taxes of $ 990 million, according to Reuters calculations.

While reallocating profits under the first measure would reduce that impact, the combined outcome of the two measures would be more than $ 1 billion.

Scientists say companies are able to mitigate the effects of tax avoidance reduction measures and may therefore reorganize to limit the effects of the proposed measures. In reality, government tax incentives mean that in practice, businesses may pay less.

Our Standards: The Thomson Reuters Trust Principles.

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