G7 global tax plan: all you need to know about the MNC crackdown
As the G7 meets in Britain on Friday 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 G20 group of industrialized and emerging economies to fight what is known as domestic tax base erosion and profit shifting (BEPS).
In other words, how multinational companies take advantage of different countries' tax systems to limit the amount of tax they pay, also known as tax optimization.
Talks at the 38-nation OECD have been given a boost by the administration of US President Joe Biden, which has proposed a global minimum corporate tax rate of 15 percent.
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 programs that were deployed during last year's global recession.
The proposed reform is comprised of 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 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 United States has suggested a 15 percent rate 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 percent, down from 50 percent in 1985.
Countries that currently tax much less than 15 percent, 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 percent, Bulgaria is at 10 percent, and Hungary is at nine percent.
Some countries such as Luxembourg or Malta have high nominal rates of 25 and 35 percent 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.
Pascal Saint-Amans, head of the OECD's center for tax policy and administration, told AFP the new US proposal would "take winners of globalization, the 100 most profitable companies in the world, which account for half of the 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 $81 billion a year, based on a tax rate of 12.5 percent.
According to the European Tax Observatory (EU TAX), if the European Union levied a rate of 25 percent, 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-percent rate was applied, European banks would pay 44 percent more, and companies such as Anglo-Dutch oil giant Shell or German insurer Allianz would pay between 35 and 50 percent more.
After the finance ministers discuss the tax plans, it will go to G7 leaders in Cornwall, England, next week before being taken up by the G20 in July.
COVER IMAGE COURTESY OF UPI