On 5 June, the G7 group of nations signed a tax agreement to tackle tax abuses by large multinational corporations and technology companies. It has been hailed as a historic agreement, as this is the first time ever that the leaders of G7 nations agreed on a minimum global tax rate. However - the work is all but done...
The reform consists of two main pillars: the first one is enabling countries to tax some of the profits made by big companies based on the revenue they generate in that country, rather than where the firm is located for tax purposes. Considering the taxation is in this case limited to taxing at least 20% of the profit exceeding 10% profit margin, this pillar will mainly catch multinationals with high-profit margins (interestingly, Amazon seems to be falling out of scope with its profit margin in 2020 being only 6.3%).
The second pillar is of more interest to the wealth management industry, as it is essentially an agreement for a minimum global tax rate of at least 15%. This is much lower than the new US President Biden put forward – he suggested a minimum of 21% - however, this agreement is still regarded as a turning point, and the inclusion of “at least” in the G7 deal means it could be negotiated higher.
The agreement evoked an instant response from a number of low-tax jurisdictions.
Hong Kong's response was focused on reassuring corporates that the tax system in Hong Kong will remain simple, with a focus on reducing the compliance burden on companies. However, it also outlined a clear intention to comply with the international agreement, emphasizing that Hong Kong is fully engaged with the ongoing discussions.
Similarly, Singapore Finance Minister also expressed the intent to collaborate with the international community to reach an agreement, however, his statement is more cautious. In assessing impact, he emphasised that it is too early to judge what the impact will be and that the new rules should not inadvertently weaken the incentives for businesses to innovate and invest. And although he expressed the intention of Singapore to support the efforts, his support comes with a caveat that the multi-lateral agreements must be “anchored on sound economic principles, promote tax certainty and ensure a level playing field across all jurisdictions.”.
In Europe, Switzerland is preparing to sign up for the G7 tax agreement, but interestingly, is already drawing up other incentives and subsidies for multinational corporations to persuade them to stay based there.
In the Caribbean on the other hand, the responses are varied. Some experts predict that for jurisdictions such as the British Virgin Islands, Bermuda, and the Cayman Islands, the G7 agreement would pose an existential threat, as they depend on revenue raised from corporations that locate there to take advantage of their tax regimes.
However, other experts disagree, pointing out that the main targets of the proposed agreement are large tech multinationals such as Amazon, Facebook, and Google, who are not traditionally the type of clientele for these jurisdictions. For the most part, BVI for example, what they do is hold entities that carry business elsewhere. So the arguement is that the impact of the new agreement is less clear and less devastating as it may seem initially. The Bahamas is largely focused on private wealth management via structures that typically use corporate vehicles as passive investment entities, which leaves it less vulnerable to the 15% minimum global corporate tax proposal.
At the G7 summit, finance ministers also agreed on the importance of progressing the work and reaching an agreement at the July 2021 meeting of the G20 finance ministers and central bank governors. In parallel, the OECD will seek to reach a global and consensus-based solution building on the current proposals by mid-2021. The next meeting of the OECD/G20 Inclusive Framework is scheduled for 30 June, 1 July 2021, and the G20 meeting is scheduled for 9-10 July 2021 – which is an ambitious timeline to work towards.
As the number of countries in the debate increases, it will likely become more difficult to reach a consensus. In addition, many details remain subject to negotiation, and technical details for both pillars need to be finalised. If an agreement is reached, the OECD will then need to design a mechanism – such as a multilateral instrument – for participating jurisdictions to implement the agreed rules. Each participating jurisdiction will then have to reflect the changes in their local legislation and relevant tax treaties, or in the EU’s case, transpose the related EU legislation.
Considering that corporate tax rates have long been a point of contention, and there are multiple conflicting interests that need to be battled out, compromised on and new rules ironed out, any agreement at G20 and OECD level in 2021 will require a significant effort, despite the discussions have been ongoing since 2018.
However, the impact of the pandemic and the threat of climate crisis has perhaps had its own impact on the way governments think about tax and would welcome additional tax revenue. It is very clear from responses so far, however, that any corporate tax rule changes will need to be implemented carefully, with assurances that tax rates will not jeopardise the existing corporate tax revenues, business investment, and innovation. Even if an agreement is reached in 2021, it is likely it will be several years before the technical details are hammered out and new legislation implemented in each individual jurisdiction.
Whatever the detailed rules and future agreements, currently the main targets of the G7 tax agreement seem to be the global multinational corporations, and the impact to the traditional international finance centres looks limited. But even with this limited impact, inevitably it will see yet another increase in the regulatory burden.