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Global tax reforms - a knockout?

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A meeting of the G20 Finance Ministers this weekend confirmed the implementation of a new global minimum tax rate (15%) and additional measures to capture more tax from the 100 largest global companies.

130 countries have agreed to the deal which includes all the major G20 economies, although some smaller countries including Ireland, Hungary and Estonia have not come on board. The US have made it clear that whilst they would like these countries to sign up to the deal, their reluctance will not have a major effect on the deal’s efficacy. The countries who have not signed up may be those who currently offer rates below the new minimum level and who have concerns over their ability to compete for inward investment if they are not able to offer a tax incentive to companies.

Over time it is hoped by campaigners that the minimum rate could be increased – adding to governments' revenues. The current system means that countries compete with each other to attract companies, based on lowering their tax rates. Companies are then able to shift profits that they make out of higher tax countries to their bases in lower tax locations. The move to a global minimum rate will ease the pressure on governments to compete by lowering their taxes and will help them to tax the profits where they are made.

The other pillar of the reform would tax the largest 100 companies profits more heavily above a 10% margin. There was real concern that Amazon would fall outside the net as its overall profitability would be below the threshold. Amazon operates in many different markets but its dominant retail arm competes strongly on prices and invests heavily, which combine to reduce their profit margin which was 6.3% in 2020. The latest proposals appear to allow governments to tax specific parts of groups of companies – so more profitable segments of Amazon’s business such as Amazon Web Services would be covered by the scope of the new rules.

The new rules together amount to a significant shift in the way that companies are taxed and the way that governments internationally work together on this. Whilst the deal may be criticised for setting the minimum rate too low and not including enough companies, it should be seen as a noteworthy and welcome change in direction. Future agreements can build on this solid foundation.

Dr Maggie Cooper

Lecturer in Management Accounting
Published 13 July 2021
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