City of London to secure exemption from new global tax rules
- Largest banks in the City of London to be excluded from new global corporate tax rules
- 130 countries, including China, are backing new 15% global minimum corporate tax
- Ireland ‘not in a position’ to sign up for new global tax reform
- UK politicians argue that the UK should have pushed for 21% global minimum corporate tax rate to help fund the NHS
The City of London is on course to secure an exemption from new global corporate tax rules to protect the largest banks within the Square Mile. The new global tax reforms were initially agreed by the Group of 7 (G7) counties, aiming to extract more money from multinational companies such as Google, Amazon and Facebook.
The Financial Times reported that the UK’s pitch to protect its financial services sector from the new global corporate tax rules were accepted during the Organisation for Economic Co-operation and Development (OECD) talks in Paris this week.
The approval is a huge boost for UK financial services but also comes at a cost. In return, the UK was urged to discontinue its digital services tax, which imposes a 2% tax on large multinational firms whose revenues are linked with user participation of search engines, social media platforms and online marketplaces.
The proposed exemption from the new global tax rules will significantly impact major banks, as many have headquarters in the City but generate income from other branches worldwide. For example, HSBC generates the majority of its income in China but is the largest bank in the UK by revenue.
It was confirmed during early June 2021 that UK Chancellor Rishi Sunak would use the OECD talks to pitch that UK financial services to be protected from the new global tax rules. The Financial Times reported that the UK’s tax exemption was approved as part of the first stage of talks, labelled as ‘pillar one’ where OECD nations outline where major multinational firms have to pay tax.
The second round of negotiations sees countries agree to a minimum global corporate tax rate, which was proposed as 15%.
130 countries agree to 15% global minimum corporate tax
In what is considered a ‘landmark moment’ for global economies, the OECD confirmed that 130 countries agreed to a global minimum corporate tax rate of 15%.
The decision builds on an agreement which took place in London last month with G7 countries concerning tax reforms for multinationals. Major economies such as China, India, Brazil and Russia have all agreed to the 15% corporate tax proposal. However, countries such as Ireland, Hungary and Estonia are yet to agree to the reforms.
Numerous countries with low or no corporation tax rates, considered ‘tax havens’ such as the Cayman Islands and Gibraltar, also agreed to the tax deal. Sources involved in the process stated these countries could see that the “writing was on the wall” concerning the new corporate tax process.
G7 countries previously stated that too many multinational firms had been let ‘off the hook’ with regard to corporate tax dodging and undermined countries with higher tax rates. It was argued that companies avoiding corporate taxes had denied governments crucial funding to help tackle the coronavirus pandemic. UK Chancellor Rishi Sunak stated that the new rules created a more reasonable tax system fit for the 21st century.
Meanwhile, Facebook’s vice president for global affairs, Sir Nick Clegg, stated that the reform was a crucial step towards business security and a means of solidifying public confidence within global taxes.
The new agreement will force multinational firms to pay a minimum of 15% tax in each country in which they operate. The new rule also aims to prevent switching profits into tax havens, a tactic often used by large tech firms. Mathias Cormann, OECD secretary-general, stated that after many years of extensive work and discussions, the new tax reform guarantees that large multinational firms pay tax rates across all the countries in which they operate.
Digital giants such as Google have managed to build colossal businesses worldwide whilst only declaring small profits across the other countries in which they operate. However, a source from the Treasury confirmed that most global tech firms had anticipated the tax changes and were optimistic about taking a more global approach.
The OECD stated that USD 100 billion is thought to be raised by restricting profit shifting, and USD 150 billion is anticipated from the global minimum tax rate.
Further tax reform discussions are scheduled to take place in Venice next month between finance ministers at G20 meetings. The aim is for a final global deal to be settled and enforced by October 2023.
Ireland ‘not in a position’ to sign up for new global tax reform
Whilst over 130 countries have agreed to the new 15% minimum global tax proposal, Ireland stated it is not in a position to agree to the reform. Ireland currently has a corporate tax rate of 12.5% and claimed to have backed a separate proposal re-allocating a share of tax to the market jurisdiction. Other countries that have not signed up for the tax reform include Barbados, Peru, Kenya, Nigeria, Sri Lanka and St Vincent & the Grenadines.
Ireland’s Finance Minister Paschal Donohoe said he could not join the consensus on the revised minimum global corporate tax rate, having already expressed Ireland’s reservation.
However, Mr Donohoe confirmed that he is committed to the process and will seek an option that Ireland can approve. The Irish Government confirmed that it would engage in further discussions over the coming months to reach a solution on the issue of minimum global tax rates. Mr Donohoe stated that aspects of the agreement required clarification and further expansion.
Ireland also outlined its wish to see further progress made with US taxes, with President Joe Biden required to push the new tax reforms through Congress. With 130 countries agreeing to the tax reform, covering 90% of the global economy, Mr Biden labelled the agreement as halting the race to the bottom for corporate taxes.
Mr Biden originally proposed a minimum corporate tax rate of 21% but was soon swayed to reduce the rate to 15%, approved by a much wider group of countries.
Is 15% minimum corporate tax enough?
Although many have praised the new tax reforms, it has also been subject to criticism from UK politicians. Labour shadow chancellor Rachel Reeves said that the UK should have fought harder for the 21% minimum corporate tax proposal. Ms Reeves acknowledged that the new rules were a step in the right direction for tax avoidance but labelled the revised rate as a ‘watered down’ version of what was meant to be achieved.
Ms Reeves identified that the intended rate of 21% would have created GBP 131 million additional funds each week for the UK to put toward the NHS and other public services and support the UK high street.
These comments were reiterated by The Institute for Public Policy Research (IPPR) thinktank, who identified that a 15% minimum rate could create GBP 7.9 billion for the UK. However, a 21% minimum rate could raise GBP 14.7 billion. George Dibb, head of the IPPR, said that the UK Government should be representing leadership and pushed to secure a global minimum tax rate of 21%, with a target of up to 25%.
George Turner, director of Tax Watch, questioned if the 15% tax rate was truly a beneficial deal for the UK, given the abolishment of digital services tax.