What is meant by ‘global corporation tax’?

As announced at the meeting of the G7 in Cornwall earlier this month, the leaders of 7 of the world’s largest economies, home to a large proportion of the world’s wealthiest companies, want to implement a global corporation tax rate, whereby multinational firms would be taxed at a base rate of “at least 15%”. This is intended to act as a powerful disincentive for profit shifting, a process whereby large companies artificially transfer their profits away from where products or services are sold to lower tax jurisdictions.

What is the G7’s proposal?

There are two main pillars to the agreed reforms. The first seeks to allow countries to tax a portion of the profits made by big companies based on the revenue they generate in said country, while the second seeks to implement a global minimum tax of “at least 15%”:

1. This proposal is anticipated to award countries the right to tax corporations on at least 20% of profits exceeding a 10% margin. However, this has fairly limited scope and applicability and will only impact around 100 firms. Importantly, some of the enormous tech giants like Facebook and Amazon Marketplace do not operate with a 10% profit margin and so would be exempt from this pillar.
2. As outlined in the accompanying blog written by tax expert Tim Crook in April of this year, the proposed global minimum tax is significantly lower than the 21% figure put forward by President Joe Biden. Indeed, both the UK and the US intend to raise their domestic corporate tax rates to 25% and 28% respectively, meaning that this figure of “at least 15%” falls far below the mark unilaterally set by leading nations. Yet the inclusion of this second pillar, a reform that has been at the forefront of the Organisation for Economic Co-operation and Development’s (“OECD”) agenda for several years, does much to widen the remit of a global corporation tax, with upwards of 8,000 multinational companies, including the aforementioned tech giants, being affected by taxation changes. This also marks an important shift in thinking, embracing a taxation regime fit for a modern world where assets and services are predominantly intangible.

Details, or lack thereof?

Outside of this dual-pillar structure, the proposals remain opaque, for good reason. Only 7 countries were involved in the initial planning phase of this programme; 139 countries in total will need to negotiate, refine and approve the plan at the OECD, including large and expanding economies like India and China specifically, home to a growing share of the world’s largest corporations with a global footprint.

Further, there are a number of significant roadblocks that will need to be cleared if this proposal is to become reality:

1. In its current formulation, the plan is believed to disproportionately benefit the US as the vast majority of the largest global companies are based there. The geopolitical considerations at play here, particularly with regards to competition with China, are self-evident and may act as a barrier to progress.
2. The UK and a number of EU nations have put pressure on technology firms by proposing or implementing unilateral digital services tax regimes. While the US is keen for these to be scrapped as part of the global tax overhaul, these will likely remain in force for a number of years while negotiations continue. This provisional agreement also signifies a victory for these tech giants who were concerned about harsher measures in the future, most importantly the costs of navigating single jurisdiction regimes, were these to be rolled out across the board.
3. Low tax jurisdictions like Ireland and Caribbean nations who have reconfigured their economies as a hub for multinationals may fiercely resist the changes. The scale of their opposition remains to be seen,, though Dublin’s Finance Ministry has suggested that, were the proposals to be enacted in their current form, Ireland would lose in excess of €2 billion in revenue from 2025.

While the details will need to be worked out and negotiations will continue for years to come, the announcement from the G7 is undoubtedly a step in the right direction and will put pressure on other major economies to accept the proposals or offer viable alternatives. In this way, the G7 have taken a major stride towards a global corporate taxation system fit for the modern era.

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