A proposal to be tabled by the US president, Joe Biden, at the upcoming G7 meeting for a 15% global corporate tax rate could reap the EU €50bn (£43bn) a year, and earn the UK nearly €200m extra alone from the British multinational BP, according to research.
Should the tax rate be set higher at 25%, the lowest current rate within the seven largest world economies, the EU would earn nearly €170bn extra a year – more than 50% of current corporate tax revenue and 12% of total health spending in the bloc.
Q&AHow would a global minimum corporation tax work and why is it needed?
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Multinationals exploit gaps and mismatches in the international tax system through a technique known as “profit-shifting”. This involves artificially allocating sales derived in one country to a lower-tax country. One of the ways this is achieved is by companies setting up a subsidiary in a tax haven and registering their intellectual property there. That entity then charges the company’s subsidiaries in other, higher-tax jurisdictions large royalty fees. By charging that “cost” to the market where the majority of revenues are made, profits can be reduced or eliminated, meaning no tax is paid. The royalty fees extracted in this way are booked as profit in the low-tax location. Profits are often shifted to countries such as the British Virgin Islands or Bermuda, which charge no corporation tax.
Tax abuse by multinationals and avoidance by rich individuals costs countries around the world $427bn a year in lost revenues, according to research by the Tax Justice Network campaign group. The UK is estimated to lose £25bn of tax income due to profit-shifting.
Proposals for a minimum global tax rate and allocating taxing rights based on where companies make their money – rather than whichever low-tax zone a firm chooses to book its profits – would help to end the “race to the bottom” where one nation slashes tax to attract business only to be outdone by another country. Such a plan would give governments greater certainty on revenue raising.
There are two key strands of the plan for a minimum global corporation tax, broadly following the work of the OECD’s “pillar one” and “pillar two” blueprints for global tax reforms set out in October.
Under pillar one, taxing rights would be granted to a portion of a multinational’s profits based on where its customers reside, irrespective of the company’s physical presence in that location. That might include a threshold that would mean this captures the world’s 100 biggest multinationals but not smaller companies.
Under pillar two, governments would still be able to set whatever local corporate tax rate they wanted. But as part of a global minimum rule, if companies paid lower rates in a particular country their home governments could claim “top-ups” to the agreed tax floor, eliminating the advantage of shifting profits to a tax haven.
Among multinationals headquartered in the UK, it is claimed that BP’s corporate tax bill would increase at that rate by €484.9m, Barclays by €911m a year and HSBC’s by €4.2bn.
The estimates will be published on Tuesday by a new independent research organisation, the EU Tax Observatory, which models the “tax deficit” of multinationals, defined as the difference between current tax payments and the sums due if global profits were subject to the same rate wherever they are booked.
Under Biden’s proposal, multinational corporations would be prevented from shifting profits across borders to exploit the most attractive low-tax locations as their profits would be taxed at a minimum global corporation tax rate either where they are booked or headquartered.
The Biden administration initially proposed a rate of 21% but last week revised the target down, saying it should be “at least” 15%, although this is regarded by the White House as a “floor” and that discussions should continue to push that rate higher.
The UK chancellor, Rushi Sunak, is understood to be sceptical about higher levels mooted for a minimum corporate tax rate while expressing support for the principle. The Treasury has said they have concerns that the policy could lead to economic activity in the UK being taxed elsewhere. The UK has the lowest corporate tax rate in the G7 at 19% although it will rise to 25% by April 2023.
Gabriel Zucman, director of the EU Tax Observatory, said the resistance of the UK and others such as Ireland, which has a 12.5% corporate tax rate, should not hold others back.
He said: “Now the argument that people use is, ‘Oh but Ireland doesn’t want more than 15%, the UK doesn’t want more than 15%’.
“But it doesn’t prevent the countries that want to be more ambitious to sign an agreement where they say for their own multinationals, ‘We’re going to impose a 25% minimum tax on their country by country profits so that even if they tax their profits in Ireland, we Germany, the US, France, we are going to collect the missing 15% to arrive at 25%. And you know what can Ireland do absolutely nothing, they will keep their law right, but that’s the offset by higher taxes in the parents countries.”
The EU Tax Observatory’s analysis of the tax deficits of multinationals is restricted to those who publish country-by-country profits, a policy likely to have been rejected by the biggest tax avoiders.
It found, however, that if the minimum corporate tax rate was set at 25%, EU governments would have earned €12bn more in 2019 just from banks headquartered in the 27 countries, meaning European banks would have to pay close to 45% more in taxes.
The study also suggests the EU would benefit even if it went alone in enforcing a minimum tax rate on non-EU multinationals profits, with an extra €30bn expected to be earned through collecting a portion of the “tax deficit” between what is being paid globally and the 25% rate.
Zucman said: “Even if there’s a global agreement on tax, there is nothing that prevents the EU, and more importantly, even one EU country unilaterally or a group of EU member states, to be more ambitious to say, ‘We are going to apply a 25% rate.’
“And if they did that, and not only did that but also if they collected part of the tax deficit of foreign nationals, it would start a race to the top.
“With 25% minimum tax, which is nothing extraordinary for the EU, it will generate 1.2% of GDP in extra revenue. So I’m not saying that it’s going to be enough to pay for Covid and everything but you know what, it could be a big part of a plan for public finances after the crisis.”