Finance ministers of the G20 economies have backed a landmark deal to prevent multinational companies from shifting profits to tax havens. The deal will introduce a minimum global corporate tax rate of 15% to deter big companies from exploring their options for the lowest tax rate. The deal will also shift how hugely successful multinationals such as Amazon and Google are taxed. Taxes for such multinational companies will come to be based partly on where they sell their products and services, as opposed to being based on the location of their headquarters. The deal marks an end to eight years of debate over the issue, with national leaders expected to give the deal the final go-ahead in October at the G20 Rome summit.
Members of the G20 group include Britain, Germany, France, India, Japan, and Mexico. The group accounts for over 80% of global gross domestic product, 75% of global trade, and 60% of the globe’s population. While most G20 economies appear to be on board with the plan for a global tax crackdown, some countries are yet to sign the pact. These countries include Ireland, Hungary, and Estonia, and other non-European nations such as Sri Lanka, Kenya, Nigeria, Barbados, and St Vincent and the Grenadines. These nations are being encouraged to sign up to the agreement by October.
The agreement is a landmark moment for the global economy. Each country that has signed the agreement will commit to a two-pillar plan to drastically reshape the global tax system, says the Organisation for Economic Co-operation and Development (OECD) in a statement.
The announcement builds on a previous agreement between the G7 Group in London last month. It will unite all of the G20 group nations, including Russia, Brazil, China, and India. However, some countries, including Hungary, Estonia, Kenya, and Sri Lanka, are yet to commit to the reforms. A number of jurisdictions that are commonly regarded as “tax havens'' were among signatories to the agreement. This included Gibraltar and the Cayman Islands.
The reforms are currently being negotiated in talks organised by the OECD, but the basis of the agreement is that multinational companies would be forced into paying a minimum of 15% tax for each country in which they operate. The agreement also includes arrangements to prevent the moving of profits into tax havens by powerful companies by empowering signatory countries to tax such companies based on revenues generated within their borders. According to the OECD, over $100 billion is expected to be produced by controlling profit shifting, and approximately $150 billion is expected to be produced through the introduction of the global minimum tax rate.
Further talks on tax reforms will take place between finance ministers at G20 meetings next month in Venice. The goal is to reach a final global agreement by October, to then be implemented by 2023.
Long criticised for the small percentages they pay in tax, big companies such as Google, Microsoft, and Apple will be pushed to pay more following a historic move by the G7 group of wealthy nations. The deal states that large multinational enterprises would pay a global minimum corporation tax of 15%. For the largest global companies, such as Amazon, 20% of profits would be reallocated to the countries where the sales originated from.
In a tweet, US Secretary of the Treasury, Janet Yellen, highlighted the importance of a global minimum tax. She stated that it would "help the global economy thrive, by levelling the playing field for businesses and encouraging countries to compete on positive bases".
However, experts have warned that Amazon may escape increased taxation unless a significant loophole in the deal is resolved. The move would exclusively apply to profits that exceed a 10% margin for the largest multinational enterprises. Due to its incredibly low profit margins, Amazon could be ruled out. According to a report by The Guardian, Amazon saw profit margins of just 6.3% in 2020, putting the multinational tech company significantly below the 10% taxation threshold. Despite having a net worth of $314.9 Billion, Amazon’s slight profit margins could potentially save the company from increased taxation costs.
Experts have recommended broader global negotiations at the G20 summit, which is set to take place in Venice this July. They say that tougher rules need to be put in place to prevent big companies from adjusting their operations to remain below the 10% threshold.
According to recent reports, the UK economy is set to grow at a slower pace than any other major advanced or emerging nation in 2018, according to the OECD.
The OECD says UK growth is forecast at 1.3% in 2018 amid a strengthening global recovery. Earlier figures presented a 1.2% growth; however this is still the weakest of the G20.
Consequently, Finance Monthly has asked several experts, market analysts and economists to comment on the news, in this week’s Your Thoughts.
Angus Dent, CEO, ArchOver:
Despite the Office for National Statistics’ cautious optimism about UK productivity in late 2017, the Office for Budget Responsibility (OBR) has refused to upgrade its productivity outlook. It’s just another chapter in a now-familiar story – the Government just can’t jolt the economy out of its lethargy.
If we can’t get out of this rut, we won’t stand much chance of making a smooth economic transition out of the EU next year – we won’t have the leeway to absorb any unexpected shocks. Despite that, Philip Hammond used today’s Spring Statement speech to essentially sit on his laurels and avoid taking any new decisive action.
While the Chancellor rests easy, British business must get to work. Given that the OBR continues to find the government’s position on SME productivity ineffectual, business owners need to take matters into their own hands and look to fund bolder new business projects and models.
They should use alternative financing options to fund new services, hire more staff and improve working conditions. You need money to make money, so UK companies must invest in driving productivity. If the Government won’t do it, entrepreneurs must take the initiative, using tailored financing to secure the tools they need to boost productivity.
Jonathan Watson, Chief Market Analyst, Foreign Currency Direct:
Whilst being rather gloomy in recent forecasts, the OECD (Organisation for Economic Co-operation and Development) are right to single out the UK for a slower pace of growth. The uncertainty created by the Brexit has seen reduced confidence in the UK and held back growth.
Business needs certainty and whatever you think the longer-term outcomes may or may not be, for now there is some mystery in what lies ahead from Brexit for the UK. Since we still don’t know what Brexit will ultimately mean, businesses and consumers cannot easily make long-term decisions. That doesn’t mean they have stopped making any decisions, life is carrying on, just at perhaps a slower pace than would have been before the vote, or upon a Remain vote.
The global economy is, as the OECD states performing better than expected, which is helping support the UK through any difficult period. This doesn’t take away the Brexit disadvantage which is currently hampering not only the longer-term overall economic outlook, but overseas investment in the UK, domestic UK business investment and consumer spending, plus that closely watched barometer of economic strength, GDP or economic growth.
Chris McClellan, CEO, RAM Tracking:
What readers of this article need to ask themselves is if they’re a follower or a pioneer? Yes, we understand that it’s being reported that the UK economy is growing at a slower pace, but what will separate those businesses that struggle from those that thrive, is their mind-set and work ethic.
I firmly believe that growth for a lot of businesses can and will soar this year by making smart, well-informed decisions. Assess not only your immediate but future risks and have well-thought out strategies to mitigate these. Consumers are always going to buy whether it be your product/service or another’s. What’s going to make you stand out is clever thinking - how can you add more value? How can you export or trade with countries in a stronger climate? This flexible approach will not only give you competitive advantage but will widen your business horizons further than just UK shores.
The introduction of trusted sites such as TrustPilot, Facebook and Google (to name a few) together with ‘consumer-power’ should not be overlooked. By focusing on exceeding and delighting your customer’s expectations will result in repeat purchases as well as positive reviews, the power of your business growth lays firmly in the hands of your customers.
At RAM Tracking, we’re increasingly analysing our data and utilising innovative technology to delight our customers and highlight improvements that need to be made quickly. Investment into platforms like Salesforce have helped us become more data focused in a bid to work smarter to save costs but still have the ability to reinvest even when growth is reported to slow down.
If you have thoughts on this please feel free to comment below and let us know Your Thoughts.
