Recently the G7 nations agreed on an important issue: the payment of corporate tax or profit tax by technology giants. Today, global corporations pay this tax at their place of incorporation. This allows companies to locate in so-called “tax havens” – countries with low tax rates – and thus save money.
The G7 nations have made the historic decision that international corporations should pay tax in the states where they earn, not where they are registered.
The corporate tax could be 15%, which is how much the world’s technology giants will pay to the budgets of the countries where they operate.
It’s clear that so far these are just preliminary agreements, and countries have yet to unify their tax laws.
But the number of participating countries is expected to grow over time (in particular, there are plans to discuss the agreement at the meeting of G20 finance ministers and central bank governors to be held in July 2021 in Venice).
How new taxes would impact Big Tech
At a recent meeting in London, the G7 nations effectively put an end to the long-running dispute over how international corporations should be taxed and who is ultimately entitled to their money.
The traditional model of taxation of profits – it is levied where the company is domiciled, which means that, in theory, branches in different countries should also pay. But it is possible to take the profits to the central office and pay where it is registered. This allowed corporations to register in countries with low tax rates, take profits there, and pay there – at reduced rates. The rest of the states got crumbs from the pie of billions of dollars in corporate profits, even though they earn their fair share in their markets.
For example, the Irish branch of Microsoft did not pay a penny of taxes in Ireland last year, although it earned $315 billion. The fact that the company is registered in Bermuda (an offshore with minimal taxes) allowed it to avoid taxation in this country. “It’s no secret that many if not all of the world’s giant companies optimize their taxation this way,” says Oleg Pendzin, head of the Economic Discussion Club.
This problem is particularly relevant in the case of companies with technological giants (Google, Microsoft, Facebook and others) that sell their content and provide services remotely. As a result, they accumulate huge cash flows, from which the countries in which they provide these services (e.g. by selling advertising or subscriptions) get nothing.
Many countries have long spoken out against this unfair distribution of profits, but the coronavirus pandemic, when budget revenues collapsed and the costs of supporting businesses and people rose, accelerated negotiations on this issue.
In the end, at the G7 meeting, the finance ministers finally found a compromise and agreed on how international corporations should pay taxes. The new formula is that income tax will be paid where the company earns. At the same time, the minimum corporate tax will be 15%, so that individual countries will not reduce it, thus trying to lure global corporations to themselves.
“Under the principles of the landmark reforms, global companies with at least 10% profitability would be covered, with 20% of any profits above 10% redistributed and then taxed in the countries where they made sales,” the agreement said.
The tax agreement was reached between the United States, the UK, France, Germany, Canada, Italy and the EU. They are counting on additional billions of euros from international corporations.
“After years of discussions, G7 finance ministers have reached a historic agreement to reform the global tax system to make it fit for the global digital era,” said the UK Chancellor of the Exchequer Rishi Sunak.
However, these are still only preliminary agreements – they will be discussed at the G20 meeting in Venice in July. As a result, the countries will work out a strategy and start unifying their tax laws.
The idea behind the decision is that there will be no jurisdictions in the world where the income tax rate will be lower than 15%, but this won’t be easy to achieve – further negotiations will be needed.
For example, representatives of Ireland, who participated in the meeting as observers, called for the interests of all countries to be taken into account. This country is one of the most popular havens for multinational companies: the rate on corporate income there is 12.5%, but all sorts of deductions can go down to 4%. To understand the difficulties that countries have to go through, it is enough to remember that even among the countries of the European Union there are different conditions for companies. Rates range from 31.5% in Portugal to 9% in Hungary.
Would tech giants pay fair taxes?
It is worth noting that the world’s giants have already said they are not against the new tax rules.
Facebook said the company is ready to deduct 15% in the country of profit.
Amazon also said that the unification of tax schemes would bring additional stability.
Google officially announced that it supports the modernization of international tax rules, and added that it expects the new agreement to be ratified as soon as possible.
In fact, the issue of tax evasion by multinational companies has been discussed for a very long time on a global level. If countries implement the new rules in their legislation, it will really prevent corporations from evading income tax in the country where the service was provided. Although it is actually very difficult to track which services were provided in a particular country and what specific profits were made there. In fact, in order to monitor this information, banking secrecy has to be completely abolished.
