PARIS (AFP) – Finance ministers from the Group of Seven (G-7) industrialised countries are going over groundbreaking global tax proposals aimed at earning more revenue from multinational companies.
As the G-7 meets in Britain on Friday (June 4) and Saturday, here is a primer on the complex and potentially pivotal development in international finance.
In 2017, the Organisation for Economic Cooperation and Development (OECD) was tasked by the Group of 20 (G-20) industrialised and emerging economies to fight what is known as domestic tax base erosion and profit shifting.
In other the words, how multinational companies take advantage of different countries’ tax systems to limit the amount of tax they pay, also known as tax optimisation.
Talks at the 38-nation OECD have been given a boost by United States President Joe Biden’s administration, which has proposed a global minimum corporate tax rate of 15 per cent.
In all, more than 135 countries and jurisdictions are collaborating on the plan’s implementation.
The coronavirus pandemic has also added urgency to the reforms as countries need new sources of revenue to pay for huge stimulus programmes that were deployed during last year’s global recession.
The proposed reform comprises two main pillars to prevent companies from using their “fiscal establishment” in a country with a low tax rate to avoid taxes on profits earned elsewhere.
Pillar one would give the fiscal authorities a right to tax the profits of a multinational headquartered overseas, for example on the sale of digital services by Internet giants.
Countries will have to agree on the level of so-called residual profit to be allocated to each tax jurisdiction based on sales in each country. Oil giant BP, for example, is present in 85 countries.
Pillar two is a global minimum corporate tax rate to stop competition between countries over who can offer companies the lowest rate – what critics call a “race to the bottom”.
The US has suggested a 15 per cent for the minimum tax rate and has gained the support of some European countries, including heavyweights Germany and France.
Economists Gabriel Zucman and Thomas Piketty say the proposal is “ridiculously weak” given that the average level of corporate tax worldwide is now 22 per cent, down from 50 percent in 1985.
Countries that currently tax much less than 15 per cent, according to OECD data, are havens such as Jersey, Guernesey, the Bahamas, Bermuda, Cayman Islands, Bahrain and the United Arab Emirates, where the rate is zero.
In Europe, Ireland has a rate of 12.5 per cent, Bulgaria is at 10 per cent, and Hungary is at 9 per cent.
Some countries, such as Luxembourg or Malta, have high nominal rates of 25 per cent and 35 per cent respectively, but they allow for multiple exemptions that lower the final bill considerably.
The reforms are aimed at very large companies with multiple subsidiaries and branch offices worldwide that make hundreds of millions of dollars in sales a year.
They are the ones with the means to find and benefit from sophisticated schemes that reduce taxable income.
The pillar one reform initially targeted digital giants such as Google, Amazon, Facebook and Apple, which did not go down well in the United States.
Mr Pascal Saint-Amans, head of the OECD’s centre for tax policy and administration, told AFP that the new US proposal would “take winners of globalisation, the 100 most profitable companies in the world, which account for half of global profit”. The US Internet giants figure among them.
As for pillar two, the minimum global tax rate would apply to fewer than 10,000 major companies, according to the OECD.
The OECD estimates that pillar two would raise US$81 billion (S$107.3 billion) a year, based on a tax rate of 12.5 per cent.
According to the European Tax Observatory (EU Tax), if the European Union levied a rate of 25 per cent, it would increase the amount of annual corporate taxes collected by half.
As for individual companies, estimates can only be made for those that publish profits in each country where they are present, which is not the case for the US digital giants.
EU Tax calculates that if a 25 per cent rate was applied, European banks would pay 44 per cent more and companies such as Anglo-Dutch oil giant Shell or German insurer Allianz would pay between 35 per cent and 50 per cent more.
After the finance ministers discuss the tax plans, it will go to G-7 leaders in Cornwall, England, next week before being taken up by the G-20 in July.