G7 Tax Agreement
On 5 July 2021, finance ministers from the G7 leading world economies agreed the principles to further tackle tax avoidance by large multinational companies.
The proposals will in part overhaul or augment the existing basis of determining how multinational companies are taxed by different countries to create what the G7 intend to be a fairer basis and one which will almost certainly increase the tax liabilities of some large multinational companies.
The proposals will also introduce a global minimum rate of corporation tax presently announced as 15%. This is below the current and planned UK corporation tax rates of 19% and 25% respectively but higher than the current rate in the Republic of Ireland of 12.5% (for none passive investment activities).
The details of how these rules will be applied have not been published by the G7 but work on similar proposals has already been extensive at the level of the G20 and OECD under their pillar one and pillar two blueprints .
Who will the changes affect?
The proposals are most likely to affect companies that presently attribute profits to intangible assets and intellectual property located in low tax countries.
While the G7 have been careful not to identify individual companies in their communique, the proposal is likely to affect the large Global tech groups like Google, Amazon and Apple. Amazon and Google immediately issued press releases after the communique offering support for the proposals as a means of modernizing and stabilising the global tax system.
What are the proposed changes?
- Award taxing rights of 20% of profit exceeding a 10% margin for the largest and most profitable enterprises. This appears to mean the new rules when finally announced will only apply to very large businesses such as Amazon and will grant countries with consumers the right to tax 20% of profits derived from sales to consumers if margins exceed 10%. It should be noted that existing OECD proposals that cover this sort of agreement may result in more companies being caught than is first envisaged.
- Remove existing Digital Services Taxes.These won’t be needed if (1) above is effective. As they only effect very largest global tech companies like Amazon they do not impact local NE businesses and similarly their removal is unlikely to have any direct impact on NE businesses.
- Global Minimum Tax of 15%. Like the award of tax rights, the OECD has already done work to determine how these might operate in practice.
The agreement and the development of detail rules will now be subject to further detail negotiation and development by the G20 in the coming months.
How will this affect businesses in the North East?
As the so called tech giants such as Amazon and Google are not headquartered in the NE this will arguably not impact NE businesses directly. However, this is a substantial change to the basis of taxation of global businesses that NE businesses trade with and through and it is too early to determine if opportunities or risks may arise to NE businesses as a result of these developments. Furthermore, based on existing OECD proposals, the final rules may well go beyond the tech giants to impact other multinational enterprises with business in the NE.
However, if the UK is able to collect more tax from the tech giants it may also go some way to mitigating future tax rises that the Treasury may have needed to apply although it is expected the 25% rate of corporation tax from 2023 announced at the March 2021 budget will continue to be implemented as will all other budget measures.
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