Corporate Tax

The G7 world corporate tax pitch is each sensible and principled

International summits can be boring and formulaic at times, but there’s a decided buzz around this week’s meeting of the leaders of the Group of Seven Advanced Economies. The G7 summit is taking place in an iodine-rich Cornish seaside resort, and in person, a sign that the toughest pandemic restrictions are slowly being dismantled. More importantly, however, it will endorse a global corporate tax pact recently agreed by G7 finance ministers.

If the heads of state and government of the G7 also establish a common position for a worldwide minimum corporate tax, the effects will be profound. The richest democracies in the world will have spoken out in favor of a revision of the system that currently cannot determine how much taxes multinational companies pay where.

Corporate giants would no longer be able to evade tax liabilities by choosing to post profits in low-tax countries. Countries in which companies sell goods or services would have tax rights on a percentage of the profits made from their territories. The era of a rich corporate entity paying little or nothing to a national government everywhere would be over. As Federal Finance Minister Olaf Scholz said, it would be a “revolution” in global tax regulations that go back to the 1920s. More specifically, it would come at a time when governments urgently need to raise revenue to offset record levels of public borrowing due to the coronavirus crisis. In 2020, governments around the world spent an estimated $ 16 trillion fighting the pandemic, and the country’s average national debt is now 99 percent of GDP (up from 83.7 percent in 2019).

If the G7 finance ministers have their way, corporate giants may no longer be able to evade tax debts by choosing to post profits in low-tax countries. AFP

Read more from Rashmee Roshan Lall

So will there be a worldwide minimum corporate tax? Some of the first heavy lifting work has already been done. In May, the Biden government declared its support for reshaping the international system and preventing a “race to the bottom” as countries cut tax rates to attract businesses. And just last week, the G7 finance ministers agreed on the specification of a minimum tax rate for companies at a two-day meeting in London. It is at least 15 percent, and countries have the right to “tax at least 20 percent of profits that exceed a margin of 10 percent for the largest and most profitable multinationals”.

What this all means in concrete terms is glaring. According to published estimates, governments would collect between $ 100 billion and $ 600 billion annually if the system were reformed appropriately to ensure that companies pay their fair share. A single multinational corporation would no longer be able to legally avoid billions of dollars in taxes, and governments would withhold revenue that is not urgently needed.

Check out the results of a recently published study by a Dutch non-profit organization, the Center for Research on Multinational Corporations. According to the report, media giant ViacomCBS, along with its predecessors Viacom and CBS, managed to pay nearly 4 billion to the Netherlands and the UK.

In 2013, a US Senate report said Apple Operations International, headquartered in Cork, Ireland, would sell $ 30 billion over four years. The Senate report analyzed how this happened, not least the fact that Apple “had no physical presence” [Cork] or any other address ”was not administered or controlled in Ireland, nor was it registered in the USA. Accordingly, Ireland did not tax its profits and the company did not owe any American taxes. Apple subsequently said it did not “use tax gimmicks” and, like recently ViacomCBS, insisted that it had complied with its commitments.

This is true. Corporations, especially giant technology groups like Apple, Google and Facebook, are complying with their legal obligations. But for too long they could get away with clever tax avoidance tactics. It’s worth noting that tax avoidance is legal; Evasion is illegal.

Ireland has attracted thousands of foreign companies with the promise of a razor-thin corporate tax rate.  Aidan Crawley / Bloomberg News

Ireland has attracted thousands of foreign companies with the promise of a razor-thin corporate tax rate. Aidan Crawley / Bloomberg News

Success is not assured, but it is clear that the need for transition has a new urgency

A 2018 study found that around 40 percent of multinational corporations’ foreign profits are artificially shifted to low-tax countries, a legal way to avoid tax debt. Ireland and Cyprus, routinely referred to as “business friendly” countries, play a role in tax avoidance plans because they keep corporate tax rates down at 12.5 percent. In the Netherlands and Luxembourg there are now rules that help companies to legally evade taxes in other countries. And Caribbean idylls like Bermuda, the British Virgin Islands and the Cayman Islands have legal zero tax systems. Many of these jurisdictions argue with some justification that they are in their right to use competitive tax policies to attract foreign investment.

Around the time Apple was getting a bad rap from the US Senate, Eric Schmidt, then CEO of Google, was articulating the mindset of large corporations. “This is how international tax systems work,” he said, adding that no computer scientist would design such a bad tax system as it exists, and tax setting is not a matter for companies but for countries and their governments.

In other words, the world needs to design an expedient tax system.

Because of me. After the heads of state and government of the G7 (plus four guests from third countries) are debating an international agreement, the process of restructuring could now really get underway.

The next hurdle will be the meeting of the G20 countries in Venice in July, which represent 80 percent of global GDP. If the G20 also comes on board, it will be a boost for the Organization for Economic Cooperation and Development, which has been coordinating negotiations between 139 countries on the taxation of companies in a globalized, digital economy for years.

Success is not assured, but it is clear that there is a new urgency regarding the need for transition. The current rules of international taxation were developed for a stationary economy. If the world is to find solutions to global problems of the 21st century, such as pandemics and climate change, it needs a just and sustainable system that taxes income from intangible sources.

Rashmee Roshan Lall is a columnist for The National

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