UK wants City of London to be exempt from G7 tax grab

• G7 finance ministers agree on a global taxation deal
• UK Chancellor Rishi Sunak wants the City of London to be excluded from the G7 tax crackdown
• Does Mr Sunak need to reconsider the way banks are taxed in the UK?
• The UK’s financial exemption would stop the EU’s power grab plan

Over the weekend, G7 finance ministers announced that they had reached an agreement on a new global taxation deal, which would force multinational companies to pay higher taxes in countries where they operate irrespective of whether they have a physical presence there.

The global tax deal, which will force multinational corporations to pay a minimum global corporate tax rate of 15%, was cited as a landmark achievement and a promising sign of renewed cooperation between the world’s largest economies.

UK Chancellor Rishi Sunak hailed the G7 global tax plan as “historic”, adding that he was “proud” of his G7 colleagues – which include the US, Japan, France, Germany and Canada – for coming together to tackle the global tax avoidance issue.

Speaking after a meeting of the finance ministers, the UK Chancellor said: “I am delighted to announce that today, after years of discussion, G7 finance ministers have reached a historic agreement to form the global tax system.”

“Not only is it fit for the global digital age, but crucially, the new system will ensure the largest multinational tech giants pay their fair share of tax in Britain – a huge prize for UK taxpayers.”

However, Mr Sunak has also demonstrated some resistance to the new global tax deal amid concern that another version of the plan presented by US President Joe Biden could force UK banks to pay higher taxes.

Will the G7 tax deal impact Britain’s financial services sector?

UK Chancellor Rishi Sunak is keen for the City of London to be exempt from the G7 tax crackdown, which involves redistributing profits from the world’s largest multinational corporations such as Amazon, Facebook and Google.

Mr Sunak is concerned that banks in the UK’s financial services sector, which he said already pay their fair share of tax, could be dragged into the mix and subjected to the global tax hike.

According to recent reports, US President Biden’s proposal could reduce the appeal of Brexit Britain and compound the latest shift that we have seen in the City of London following the end of the Brexit transition period.

In the last few months, many financial services companies in the UK have relocated to the EU due to uncertainty over access to the bloc’s single market.

Although London still holds the crown, the changes proposed by Joe Biden could further jeopardise its status as Europe’s dominant financial centre.

So far, G7 leaders have agreed on two pillars of the deal: one enabling nations to tax multinational firms profits based on their market sales and the second being a global minimum tax rate of 15% – which would apply to thousands of firms worldwide.

However, sources close to negotiations said that the UK and the EU were pressing for its financial services sectors to be excluded from pillar one. According to the bloc and Britain, the profits generated by financial services companies are already taxed heavily in their respective market.

Currently, corporation tax in the UK is set at 19%, but during the all-important March Budget statement, Mr Sunak said that he would be raising the rate to 25% in 2023.

Both Britain and the European Union hoped that the US would agree to the terms in exchange for European support on pillar two but it appears to have had little luck thus far.

The Biden administration has also reportedly threatened to penalise both nations if they don’t drop their unilateral digital services taxes.

Regarding the G7 tax plan, Washington presented plans to the Organisation for Cooperation and Development (OECD) back in April 2021 , scrapping these exemptions amid concerns that US tech giants would be singled out.

Rishi Sunak pushes for the City of London to dodge a G7 power grab

In a report published by the Organisation for Economic Cooperation and Development (OECD), the intergovernmental firm included a carve-out for financial services companies and extractive industries such as oil, mining and gas firms from pillar one.

However, these carve-outs that UK Chancellor Rishi Sunak and European finance ministers are seeking to reinstate.

Currently, pillar one includes plans to target consumer-facing companies and digital businesses. Given that the blueprint published by the OECD also noted that financial services companies are generally required to have “appropriately capitalised entities” and their profits are taxed in each respective market, they have also come under scrutiny.

Furthermore, US President Joe Biden said that pillar one’s proposal was cross-sector, meaning it can also target financial services firms.

Although the EU and the UK are fighting for financial exemption, it remains unclear whether all businesses within the sector would be excluded from the new G7 tax crackdown.

The EY Item Club’s global government and risk tax leader, Chris Sanger, stated: “Some G7 leaders assume that their countries financial services sector would be exempt from the new tax plan.

“However, the question now remains as to how to manage these exceptions and all the complexities they bring.”

Rishi Sunak is expected to put forward a case for Britain’s financial services sector before talks move to an all-important G20 summit hosted by Italy next month.

Banks weren’t intended to be a target of tax reforms; however, the divorce from the EU has added to the pressure, and the UK is now keen to prove that post-Brexit Britain can still attract multinational corporations.

Financial services were largely ignored by UK and EU negotiators during Brexit trade talks. Still, the bloc’s reluctance to grant equivalence status has led many firms to question their long-term future in Britain.

Ahead of political talks between British Prime Minister Boris Johnson and the recently inaugurated US president, Joe Biden, the UK Treasury promised to ensure that the firms in the UK “pay the correct taxes in the right places” moving forward.

While it remains up in the air whether an exemption would result in lower tax bills due to financial companies already being heavily regulated, Mr Sunak has won support for his efforts to protect the sector.

The G7 group negotiates the global tax plan further next month when G20 countries – including China, Russia, Brazil and Australia – join negotiations.

After which, talks will extend to a meeting of 139 countries overseen by the OECD, with a final concord expected to be reached by October 2021.

Brexit Britain’s lobbying efforts criticised by experts

Although Britain’s Treasury is pushing for a finance exemption from the G7 global tax deal, Rishi Sunak’s protective stance for the industry has not been met with widespread support.

UK Tax Research LLP Director Richard Murphy described the Treasurer’s efforts to protect the industry as mediocre, adding that he had not made enough “fuss” about the issue.

Meanwhile, EY Item Club UK Banking Tax Partner Richard Milnes said that any partial divestiture of a financial business unit “should not be seen as a concession.”

Mr Milnes added that these carve-outs should provide “an indication of the pragmatic challenges” that new rules have on a sector that already pays tax to other entities.

Banks usually have higher tax rates than other firms, and according to the latest findings, President Joe Biden’s G7 deal would generate approximately GBP 172M for the UK economy each year.

Among the multinational firms headquartered in the UK, Barclays would be forced to pay around GBP 784M more in tax, while HSBS would have to hand over an additional GBP 3.62BN.

Most banks that operate in London are foreign-owned or generate most of their revenue overseas, with more than half of HSBC’s income coming from China.

A representative of UK Finance, representing the financial services sector, said: “We believe the new tax plan should seek to ensure that Britain remains an attractive place to do business and is globally competitive to support the broader economic recovery.”

It comes as the US urges countries, including the UK, to scrap digital services taxes and adopt the pillar one system until the overhaul of the international tax system is complete.

According to a private investigation firm, TaxWatch, the move would cost the UK a minimum of GBP 230M, and Mr Sunak voiced his concerns about the issue during the G7 summit of finance ministers.

Washington hit back at his remarks, explaining that they were wary that maintaining digital services taxes would see US tech powerhouses such as Amazon, Google, and Facebook suffer disproportionately.

Labour politician Margaret Hodge has also criticised the Chancellor for acting in support of the industry when he is merely “trying to get an exemption for his mates in the City”, she tweeted.

Under pillar one of the G7 global tax deal, governments can tax 20% of profits from the world’s largest corporations above a 10% margin.

Ms Hodge argued that all companies should pay their fair share of taxes, and the move to exempt some banks goes against the aim of the plan, which is to stop multinational firms from shifting their profits to other countries and committing tax evasion.

Separate data has also shown that the UK will reap far more benefits from a global minimum tax system than the pillar one proposal. The Institute for Public Policy Research (IPPR) estimates an additional GBP 7BN a year for the economy.

According to an EU forecast, the bloc would earn nearly GBP 43BN a year with a 15% global minimum tax rate. Furthermore, if the rate were set higher at 25% like US President Joe Biden initially proposed, continental Europe would earn approximately GBP 146BN (EUR 170BN) extra each year.

Still, the Treasury is concerned that the new international taxation policy could lead to economic activity in the UK being taxed elsewhere.