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Unprecedented. Seismic. Changing the world. The finance chiefs of the G7 countries achieved superlatives as they cheered on Saturday corporation tax agreement. After nearly a decade of conversations, it’s an extraordinarily bold plan. But expectations about a massive tax contingency are out of place.
The agreement has two components. One aims to tackle the race towards the bottom of tax rates by imposing a minimum global tax on corporations in large corporations. The second component would require larger and more profitable companies to pay more taxes in the countries where they make their sales. One-fifth of its global profits above a 10% profit margin would be reallocated in this way.
Large companies should have higher tax bills. But for how much? Some big numbers are going around. EU multinationals should pay around 50 billion euros or 15% month in taxes worldwide, according to the EU Tax Observatory based in Paris. Similarly, the UK would pick one up An additional £ 7.9 billion, according to the IPPR think tank.
These estimates seem exaggerated. Expanding a previous OECD estimation suggests additional revenue of less than 4% or $ 84 billion. The bulk would be paid for by the tech giants in the US and other multinationals. Weak anti-avoidance rules allowed them to move profits to tax havens more easily than companies located elsewhere.
The second component will cost companies less overall, up to $ 12 billion or 0.5% of global corporate tax revenue. Some high-profile companies like Amazon, with a net profit margin of 7.5%, may be completely out of scope. But the measure is significant nonetheless, as it would mix $ 100,000 million in profit tax cuts between countries.
The US would pay a large part of the bill for this. Their companies account for 72% of the profits of the world’s 100 most profitable multinationals, according to the Tax Foundation. This will make it difficult to reach this agreement through Congress.
The tax plan should be seen as a great deal. In exchange for allowing greater taxation of U.S. multinationals by other countries, Washington would obtain a widely applied global minimum tax rate. This would allow the United States to increase its corporate tax rate without fear of being subject to other countries. It would also motivate the UK, Italy and other countries to abandon their digital taxes. In return, the US would terminate its threat to impose tariffs.
The hype about this long-awaited agreement would be justified if an costly fiscal and trade war were avoided.
Lex’s team is interested in hearing more from readers. Let us know what you think of the global corporation tax agreement in the comments section below.
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