Recently, there has been a growing unrest among regulatory agencies over the alleged evasion and inflation of taxes by companies, especially by tech giants that sit on top of the business world. Early last week, it had come to light that the Silicon Six (6 of the biggest tech firms in the USA, including Facebook, Microsoft, Alphabet, Amazon, Netflix, and Apple) had been inflating their reported taxes for over a decade, something that shook everyone in the industry and lead to many demanding stronger restrictions.
Now however, it seems that the tides are turning, as the G7 Summit 2021 just reached a historic deal, wherein a minimum global corporate tax will be set up, and will have to be followed by these companies.
Under the terms of the new deal( finalized by the finance ministers of the member nations), a minimum tax rate of 15% will be mandatory (it may be noted that this is quite low compared to the bottom limit that was being demanded by the likes of POTUS Joe Biden).
Moreover, now companies belonging to the USA, UK, Italy, France, Japan, Germany, and Canada will have to register a change in the names of those who benefit from their taxes. Once the deal comes into force, it will force MNCs to pay more taxes at the location of their operation, so that they can be prevented from raking in vast profits by setting up business in countries with low corporate taxes.
What this means is that if a firm, say Company A, which is headquartered in the USA, decides to set up a branch in an Asian country (which up till now had tax rates lower than the global minimum of 15%), it will now have to pay a higher amount of tax in that country than what it used to pay, due to the worldwide bottom rung for taxes being lifted to 15%. This can in turn have several implications on the business of mega firms and industry giants.
The move was welcomes by Rishi Sunak, Chancellor at the Exchequer in the UK, who said, “I am delighted to announce that today after years of discussion G7 finance ministers have reached a historic agreement to reform the global tax system.” He further added, “To make it fit for the global digital age, but crucially to make sure that it is fair so that the right companies pay the right tax in the right places and that’s a huge prize for British taxpayers.”
The plan of action was further elaborated upon by Sunak on Twitter, as he explained that for now, companies with a profit margin in excess of 10% will be subjected to the new regulations. A tax of 20% above that margin will be extracted from them, and re-allocated to the countries where they do business, for taxing. Moreover, the worldwide minimum of 15% will hopefully work to “deincentivise” firms from declaring profits in countries with lower tax margins.
What’s surprising (or maybe just a corporate move) is that the deal was also hailed by Facebook Inc. through Vice President Nick Clegg. Siding with the higher tax rates, Clegg said, “Facebook has long called for reform of the global tax rules and we welcome the important progress made at the G7. Today’s agreement is a significant first step towards certainty for businesses and strengthening public confidence in the global tax system. We want the international tax reform process to succeed and recognize this could mean Facebook paying more tax, and in different places.”
One interesting aspect of the deal is how much in favor of the Biden administration it is. The Democratic Party-led US government has been calling for higher global tax rates, hoping that increasing expenses of trade worldwide will encourage foreign companies to stick to the US market (which, till now, had tax rates significantly higher than many other nations).