G7/corporate tax: a hard but fragile bargain

Unprecedented. Seismic. World-changing. The finance chiefs of G7 countries reached for superlatives as they hailed Saturday’s corporate tax deal. After nearly a decade of talks, it is a remarkably bold plan. But expectations of a massive tax windfall are misplaced. 

The accord has two components. One aims to address the race to the bottom on tax rates by imposing a global minimum corporation tax on large companies. The second component would require the largest, most profitable companies to pay more tax in countries where they make their sales. A fifth of their global profits above a 10 per cent profit margin would be reallocated in this way. 

Big companies should be braced for higher tax bills. But by how much? Some big numbers are doing the rounds. EU multinationals would have to pay about €50bn or 15 per cent more in taxes globally, according to the Paris-based EU Tax Observatory. Similarly, the UK would collect an extra £7.9bn, according to the IPPR think-tank. 

Such estimates look overblown. Scaling up an earlier OECD estimate suggests extra revenues of less than 4 per cent or $84bn. The biggest share would be paid by tech giants to the US and other multinationals. Weak anti-avoidance rules enabled them to move profits to tax havens more readily than companies based elsewhere.

The second component will cost companies less overall — at most $12bn or 0.5 per cent of global corporate tax revenues. Some high-profile companies such as Amazon, with a 7.5 per cent net profit margin, may be completely outside its scope. But the measure is significant even so, as it would allow for the taxing rights on $100bn of profits to be shuffled between countries. 

The US would foot a large part of the bill for this. Its companies represent 72 per cent of the profits of the world’s 100 most profitable multinationals, according to the Tax Foundation. That will make it tricky to get this agreement through Congress. 

The tax plan should be seen as a grand bargain. In exchange for allowing greater taxation of US multinationals by other countries, Washington would get a widely applied global minimum tax rate. That would allow the US to increase its corporate tax rate without fear of being undercut by other countries. It would also prompt the UK, Italy and others to drop their digital taxes. In return, the US would rescind its threat to impose tariffs.

The hype about this long-awaited deal would be justified if it averted a costly tax and trade war.

The Lex team is interested in hearing more from readers. Please tell us what you think of the global deal on corporate tax in the comments section below.