Governments Want a Big Deal on Global Taxation
Governments Want a Big Deal on Global Taxation
The Group of Seven major economies have agreed to introduce a 15 per cent minimum corporate tax rate to be applied worldwide by national governments. Less is being said about seeking global agreement on the basis of implementing the tax – a more important and much more controversial issue.
The Economist says that in theory big corporate groups operating internationally pay taxes on where they have their headquarters, and where they do the work that produces their profits.
An individual firm’s legal affiliates are typically taxed separately, with transfers between them recorded as if on the open market. In practice, firms cut their tax bills by divorcing their reported profits from where they conduct the business producing them. This has become easier because of the rise of intangible assets such as brands. Quantifying profits and determining where they arise has become more a matter of judgement, even opinion.
The share of foreign profits that American multinationals such as Amazon, Google and Facebook book in tax havens has doubled since 2000, to 63 per cent in 2018. “We estimate they had only 5 per cent of their staff in these places,” says The Economist. “They booked more profit in Bermuda than in China.”
Governments want to curb “transfer pricing,” the basis of this profits-shifting, by taxing big global companies accessing their markets, where their profit-generating activity is actually taking place, based on measures such as sales.
Furious at the transfer pricing system said to cost countries up to $240 billion a year in lost taxes, governments have started to fight back by introducing special taxes on multinationals.
The most favoured are taxes on digital services. The UK version applies to companies operating in the country that have global sales of more than $500 million. A 2 per cent tax is levied on local sales of more than $25 million.
Taxes such as that have triggered nasty ongoing rows between the US, home base of the international global giants, and major allies such as Britain, France and Italy.
The announced G-7 agreement is the first step towards introducing an agreed worldwide reform on taxing multinationals, but the negotiations have a long road ahead before conclusion. Agreeing to a minimum rate of tax will be relatively easy; the devil will be in the detail of the system to be applied to implement it.
