The landmark corporate taxation deal by the Group of Seven countries does not go far enough to prevent large companies shifting profits to tax havens or deter low-tax nations from using loopholes to get round the system, critics have said.
Some of those opposed to the G7 deal say the pact, which saw finance ministers set a global minimum corporate tax of at least 15 per cent in London, stops short of achieving what it set out to do.
Wealthy nations, such as the US and Britain, want to squeeze more money out of multinational companies, such as Amazon and Google, and reduce their incentive to move profits to low-tax offshore havens.
However, former British prime minister Gordon Brown said the G7 must do better because the existing agreement does not “solve the problem” as it still acts as an incentive for big companies to stick with the tax haven offering the lowest rate.
“The rate of taxation is only 15 per cent whereas Britain is going to charge 25 per cent and America 28 per cent. It will be still be an encouragement to continue with tax shelters and tax havens that are completely unacceptable,” Mr Brown said.
“It's not a good deal for most of the poorest countries of the world who are still losing billions from tax avoidance and tax abuse.”
Mr Brown pointed to Ireland – attractive to foreign multinationals because of its 12.5 per cent rate – where big tech firms such as Apple, Facebook and Google directly employ about one in eight workers and account for more than 80 per cent of corporation tax receipts.
Ireland’s Finance Minister Paschal Donohoe, who attended Saturday's meeting as president of eurozone's grouping of finance ministers, said any deal must factor in the economic needs of smaller nations.
The anticipated changes will lead to Ireland's annual corporate tax take dropping by 20 per cent, or €2 billion, than it otherwise would have been by 2025, he argued.
However, Mr Brown said Ireland would “find a way around this because there are so many loopholes in the scheme”.
“Ireland could raise its tax rate to 15 per cent, then allow lots of exemptions and still become still be a tax shelter that companies go to, even if it's not where their economic activity and their profits have been made,” he said.
"So, we really haven't solved the problem. What we've begun to do is recognise what's wrong, that we need a corporate tax rate that is global, but we haven't done enough to get the money in. This is a matter of fairness and justice and decency.”
Former HMRC chief, Sir Edward Troup, said while Ireland has indicated it is not happy with a 15 per cent rate, "the Irish are very good at doing deals".
"The Irish are good international players, but they tend to get their pound of flesh for whatever they agree," he said.
"So, while I think the Irish will eventually, if this agreement comes to fruition, give up some of that, the beneficial status they offer to multinationals in which they benefit from, I'm sure that they will do so, you know, for a price and will come out of this reasonably well.”
Switzerland, another traditionally low-tax country, said on Monday it had taken note of the G7's intent, after already promising to eliminate special low-tax rates that benefited around 24,000 foreign companies.
"For Switzerland, the focus is on the overall package of competitive framework conditions for its own business location. Either way, Switzerland will take the necessary measures to continue to be a highly attractive business location," it said.
However, Stuart Cole, head macroeconomist at brokerage Equiti Capital, said both the tax havens and the big tech companies would find solutions to a higher minimum levy.
“These big tech companies are very good at exploiting loopholes and finding ways around tax legislation, so I'm sure that they will have their lawyers working on this,” he said.
"Tax systems in different countries are not uniform; they tax things differently, they define things differently and there will be ways around this. There always are.”
Hailed as historic by the countries that brokered the agreement, the G7 deal is made up of two pillars: the first would see companies pay a percentage of their profits in markets where they make large profits, despite a low corporate presence, while the second is a global minimum corporation tax of 15 per cent.
Under the first pillar, the G7 agreed that governments should have the right to tax at least 20 per cent of the profit earned in their country by a multinational over a 10 per cent margin.
However, critics argue that the 10 per cent margin "for the largest and most profitable multinational enterprises” could rule out Amazon.
While Amazon is one of the largest businesses in the world, with a market value of $1.6tn and sales of $386bn in 2020, its profit margin last year was only 6.3 per cent.
This is because it runs its online retail business at very low profit margins, partly to reinvest heavily and partly to gain market share.
“Companies like Amazon don't seem to be covered by this. And yet, they're making massive profits,” Mr Brown said.
🚨 At the @G7 in London today, my finance counterparts and I have come to a historic agreement on global tax reform requiring the largest multinational tech giants to pay their fair share of tax in the UK.
— Rishi Sunak (@RishiSunak) June 5, 2021
👇The thread below explains exactly what this means. #G7UK pic.twitter.com/HdcK1HuM91
The second pillar agrees on a global minimum tax, giving countries the right to add a top-up tax on company profits in countries with tax rates lower than the global minimum.
The G7 wants the minimum rate to be applied on a country-by-country basis, rather than an average across the countries in which a company operates – an approach considered far tougher on tax havens.
If a US company books profit in the British Virgin Islands, for example, where there is no corporate tax, US tax authorities could apply a 15 per cent tax on those profits.
Keeping the floor of the minimum tax rate at 15 per cent has been heavily criticised, with countries, including France, pushing for a higher level.
Campaign group Oxfam said the 15 per cent was "setting the bar so low that companies can just step over it".
Mathias Cormann, secretary general at the Organisation for Economic Co-operation and Development, said a 15 per cent levy would be a “very significant step forward” that leaves countries enough margin to compete.
“It’s important we strike the right balance,” he said on Monday. “If we were able to achieve a circumstance where all multinational companies operating globally are required to pay at least 15 per cent on their profits, I think that is a very significant step forward”.
While the OECD calculated in October that a global minimum tax could yield $100bn a year, or 4 per cent of global corporate income tax based on the 12.5 per cent rate discussed at the time, Mr Troup said that would take some time to achieve.
"It is very impressive that we have got America to the table, and that President Biden and his team are prepared to commit ... but it's a very long way from raising any money and, in the UK we've got to remember this probably won't mean much more money," he said.
With most of the companies affected by the deal were US-based multinationals, Mr Troup said the US and other countries were more likely to benefit as the G7 communique was “very carefully worded" and putting the two pillars together did not mean the "UK will get 15 per cent of Facebook's profits".
"There is a huge amount of devil in the detail and that detail is not going to take multinational agreements across the various forums, it's also going to take domestic legislation, and that in turn will take a considerable period of time,” Mr Troup said.
The next stage is a June 30 online meeting of the 139 countries negotiating future rules for cross-border taxation at the OECD in Paris.
From there, any agreement goes before G20 finance ministers for endorsement when they meet in Venice on July 9.
The OECD and the US say a final sign-off might not be possible until a subsequent G20 meeting in October, because the US position may not be firm by July as a domestic tax package will be going through Congress.
“Realistically, is it going to happen in the next three to four years? I doubt it,” Mr Cole said.
“It’s one of those problems that reminds me of trying to pin the tail on the donkey with a blindfold on. I can see it causing as many arguments and problems as it will solutions.”
The G7 was “bullied” into the taxation deal, Mr Cole said, after the US threatened to slap tariffs on $2bn of goods from the UK and five other countries – in a move that risked reigniting a transatlantic trade war – unless the corporate tax talks could be resolved.
The argument centred on the countries' “digital services” taxes on tech companies, levied in 2020 when Donald Trump’s administration was hesitant to support a minimum global tax, with Washington calling the taxes unfair because they disproportionately affected American firms.
"To ‘encourage’ these nations to wrap such taxes in the minimum tax framework just agreed, the US has simultaneously levied and then suspended 25 per cent tariffs on select imports from the UK, Italy, Spain, Austria, India and Turkey for 180 days, while the final details of the global tax agreement is finalised," said Norman Villamin, chief investment officer, wealth management at Union Bancaire Privee.
Countries negotiating the global tax rate further down the line are also likely to exempt some sectors, such as research and development, while others, such as China, want to protect low-tax economic zones they use to attract investment.
“The bigger issue is that the G7 deal is just seven countries. You've got countries, such as India – a massive market for the tech companies – wanting the right to impose their own rates, such as a 20 per cent Google tax," Mr Cole said.
"How do you bring these countries on board, let alone G7-antagonistic countries, such as China or Russia, which for political as much as economic reasons won’t want to be seen to be toeing the US line in an agreement like this?”
