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.
Unsurprisingly, the market’s reaction to the grand breakthrough G7 announcement of a landmark “minimum corporate tax rate of 15%” is one such moment of noise over substance. While the announcement played brilliantly with the political classes who argued: “at last global corporate tax rates are being addressed and the largest tech firms will now pay their fair share”, does it mean corporates will suffer the ignominy of paying actual taxes?
Of course they will…not.
The share prices of the largest tech firms with the finest tuned tax-minimisation corporate structures barely yawned. The salaries of Corporate Tax Lawyers and Tax Accountants are already going North in anticipation of a feeding frenzy for their services. These professions set to reap windfall profits from the political posturing around the tax noise. They will dissect the deal’s underpinnings with a fine comb, identify the back doors, engage lobbyists to push for advantageous clauses, and get set to arbitrage every single facet of the deal – assuming it ever happens and becomes a reality.
If any European country ever receives anything close to a cheque for 15% of the profits made by a big digital tech company selling in their borders, I shall eat my hat. (I get to choose which one…) I’ve already seen a scheme from one accounting firm outlining how a major internet retailer that isn’t a river in Egypt can wriggle out because of the marginal cost calculations… something to with governments getting “the right to tax 20% of profits exceeding a 10% margin” – which sounds much less than 15% of profits the politicians blithely assure us they have secured.
But, of course, and tax deal is a win/win for everyone:
On the face of it, the Irish should not be particularly happy at the loss of the jurisdictional arbitrage advantage – but even they are smiling. They know big European-tax dodgers aren’t going to haul out of Dublin any time soon. Many may decide to beef up their tax special-forces in Ireland in the expectation any tax deal is still years away from full ratification by all the members of the OECD, and that it may not happen at all… ever.
And there is no guarantee the Americans are going to accept it. Political gridlock and a Republican Party in thrall to the Beast of Mar-a-Lago means if it looks bad for America, then it hasn’t a breeze of passing. The reality is the new G7 minimum tax proposal is going to struggle to get through the slough of despond that is deepening US political gridlock. The Republicans are already parroting Trump that such a deal can’t be good for US Company revenues, therefore should be rejected.
What will the G7 tax deal mean for markets?
It’s going to be a busy time for the credit agencies, figuring out if the shock horror of corporates actually paying taxes in countries where they sell stuff, pushes a few names down a credit notch or two because paying taxes comes before paying bondholders. I’d be surprised if they find many lame ducks – but the credit agencies won’t miss the opportunity to be relevant and will no doubt start pumping out research for bond managers to fall asleep over.
In the real markets, experience equity investors know corporates will find new and better tax avoidance schemes to supersede whatever the agreement outlaws. As one wag once pointed out: “if you’re paying taxes on profits, you ain’t doing it right.”
That leaves an interesting thought: what about all the US tech firms now sitting on enormous cash piles, built up from untaxed profits channelled through corporate headquarters in nations willing to charge zero taxes – like Ireland? Retroactively taxing these untaxed gains isn’t on the agenda and will never ever happen…. Better spend the money on acquisitions, infrastructure, etc… heaven forbid paying staff better. But company spending is an economic multiplier – so it’s a good thing. Right? It will push up the stock price and allow Jeff Bezos to fund his trip to the moon…
I suspect that in the long run, all we will ever remember about the successful G7 agreement on tax was that there was an agreement… it will be rigorously enforced… and the tech giants still won’t pay very much tax.
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.
New figures from the Office for National Statistics (ONS) have shown that UK GDP fell by more than 20% between April and June. Following on from a drop of 2.2% between January and March, this means that the UK has now officially entered a recession.
The 20.1% drop in quarterly GDP exceeded that of all other G7 nations; France’s GDP fell by 13.8%, followed by Italy at 12.4%, Canada at 12%, Germany at 10.1%, the US at 9.5% and Japan at 7.6%. It is also the steepest recorded contraction since the ONS began collecting data in 1955.
In an interview with Sky News on Wednesday morning, Chancellor Rishi Sunak attributed the contraction to the “composition” of the service-based UK economy, which was heavily affected by the COVID-19 pandemic and resultant lockdown measures.
“Social activities, for example going out for a meal, going to the cinema, shopping, those kinds of things comprise a much larger share of our economy than they do for most of our European comparative countries,” he said.
“So in a situation where you have literally shut down all those industries for almost three months, a long period of time, it is unfortunately going to have an outsized impact on our economy.”
Commercial data and analytics firm Dun & Bradstreet have updated their predictions for the UK economy in 2020 following the new figures’ release. Their updated forecasts now predict a 9.8% drop in real GDP for the year.
“Dun & Bradstreet’s latest proprietary data for Q2 shows that payment performance has deteriorated across all 14 sectors tracked during the pandemic, despite several quarters of continuous improvement prior to lockdown,” wrote the firm’s chief analyst, Markus Kuger. “During the coming quarters, it will be more important than ever for businesses to assess potential credit risk across their existing and future business relationships.”
The basic definition for a recession is a decline in GDP over two consecutive quarters. The UK has not experienced a recession since the 2008-2009 financial crisis, which saw a peak quarterly dip of 2.2% in GDP – just over a tenth of the plunge recorded for Q2 2020.
Chris Laws, Global Head of Product Development, Supply & Compliance Solutions at Dun & Bradstreet, explains why the EU blacklist is an important tool to combat financial crime and will be welcomed by those responsible for the fight against money laundering.
The EU recently updated its anti-money laundering blacklist that names countries it considers to have deficiencies in tax rules that could favour tax evasion and anti-money laundering (AML) activities. The European Commission introduced the list at the end of 2017 and recently added ten new jurisdictions including United Arab Emirates, Oman and Barbados. The updated list has been rejected by governments within the EU, and now Brussels is being forced to review the list that was established to promote tax governance and prevent tax avoidance. The published objectives include ensuring transparency and fair tax contribution, and coupled with the 5th EU Money Laundering Directive, the list was viewed as a valuable tool in the fight against money laundering, helping to protect global organisations from the reputational and financial risk of illegal activity within their supply chains.
The recent debate comes after a year of high-profile scandals engulfed some of Europe’s biggest banks and Nienke Palstra, at campaign group Global Witness believes that “Europe has a major money-laundering problem”. While organisations such as the Financial Action Task Force – a group established 30 years ago by the G7 – were set up to combat fraud at an international level, previous list have excluded countries such as Panama, which recently hit the headlines relating to high-profile financial fiascos. With a rapidly changing landscape and increasingly sophisticated financial crime, having accurate information on country level risk essential to help businesses to identify potential illegal activity and take steps to mitigate exposure.
The Brexit effect
The UK’s National Crime Agency reported a 10% rise in ‘Suspicious Activity Reports’ (SARs) in 2018 compared to the year before, with specific money laundering reports increasing by 20%. The agency’s report came as London was accused of “acting as a global laundromat, washing hundreds of billions of pounds in dirty money from around the world” and the impending departure from the EU is likely to exacerbate concerns about illegal activity within the UK.
With continued uncertainty over trade arrangements post Brexit, UK-based companies looking at trading opportunities outside of the EU will need to evaluate the risk involved with working within other markets and complete comprehensive due diligence and take steps to ensure strict controls over transactions with countries flagged as posing increased risk. According to the NCA, Brexit will increase the number of opportunities for money laundering as foreign firms could potentially look to invest ‘dirty money’ in British businesses as EU AML agreements become increasingly uncertain.
Despite the uncertainty, businesses can evaluate potential risks and limit exposure by implementing an efficient and clear risk management policy – and ensuring they have a transparent view of supplier and partner relationships. A robust compliance process is achieved through a combination of the right data and the right technology to support effective Know Your Customer (KYC) and Know Your Vendor (KYV) activities. A PWC report in 2016 looked at the ‘future of onboarding’ and suggested that technology provides a solution to accurate identification and verification, using technologies such as biometrics, blockchain and digital identification. The utilisation of artificial intelligence (AI) is increasing and can be a valuable tool to support compliance processes.
AI can be used to develop an informed and accurate compliance model, untangle an overwhelming volume of data and identify (and therefore reduce) false information in monitoring systems. Traditional tools and technology are simply not able to manage the increasing amount of data sources and the speed of change that artificial intelligence can process. AI systems can reduce the time spent on manual processes, allowing compliance experts to devote attention to more in-depth analysis of suspicious activity.
The ever-increasing sophistication of criminal organisations and their ability to mask illegal activities poses a genuine challenge for businesses operating in high risk jurisdictions. It’s more important than ever to know exactly who you are doing business with and having access to details such as beneficial ownership and ‘People with significant control’ (PSC). With a recent survey suggesting anti-money laundering compliance costs U.S. financial services firms $25.3bn a year, it’s an expensive and very real issue that businesses need to take seriously.
Tools such as the EU blacklist can play a crucial role in delivering increased transparency to deter and identify illegal activity and to ensure an enhanced level of scrutiny of business relationships to mitigate risk. Using third-party data to complement a company’s existing data set can improve due diligence, and having the latest technology in place to analyse huge volumes of data could be key to avoiding exposure to regulatory fines and reputational damage.
Amidst the recent shock resignations of Brexit Secretary David Davis and Foreign Secretary Boris Johnson, investment uncertainty, slower economic growth and a weaker pound, the United Kingdom is on its way to a slow but steady Brexit, with negotiations about the future relations between the UK and the EU still taking place.
And whilst the full consequences of Britain’s vote to leave the EU are still not perceptible, Finance Monthly examines the effects of the vote on economic activity in the country thus far.
Do you remember the Leave campaign’s red bus with the promise of £350 million per week more for the NHS? Two years after the referendum that confirmed the UK’s decision to leave the European Union, the cost of Brexit to the UK economy is already £40bn and counting. Giving evidence to the Treasury Committee two months ago, the Governor of the Bank of England Mark Carney said the 2016 leave vote had already knocked 2% off the economy. This means that households are currently £900 worse off than they would have been if the UK decided to remain in the EU. Mr. Carney also added that the economy has underperformed Bank of England’s pre-referendum forecasts “and that the Leave vote, which prompted a record one-day fall in sterling, was the primary culprit”.
Moreover, recent analysis by the Centre for European Reform (CER) estimates that the UK economy is 2.1% smaller as a result of the Brexit decision. With a knock-on hit to the public finances of £23 billion per year, or £440 million per week, the UK has been losing nearly £100 million more, per week, than the £350 million that could have been ‘going to the NHS’.
Whether you’re pro or anti-Brexit, the facts speak for themselves – the UK’s economic growth is worsening. Even though it outperformed expectations after the referendum, the economy only grew by 0.1% in Q1, making the UK the slowest growing economy in the G7. According to the CER’s analysis, British economy was 2.1 % smaller in Q1 2018 than it would have been if the referendum had resulted in favour of Remain.
To illustrate the impact of Brexit, Chart 1 explores UK real growth, as opposed to that of the euro area between Q1 2011 and Q1 2018.
As Francesco Papadia of Bruegel, the European think tank that specialises in economics, notes, the EU has grown at a slower rate than the UK for most of the ‘European phase of the Great Recession’. However, since the beginning of 2017, only six months after the UK’s decision to leave the EU, the euro area began growing more than the UK.
Reflecting on the effect of Brexit for the rest of 2018, Sam Hill at RBC Capital Markets says that although real income growth should return, it is still expected to result in sub-par consumption growth. Headwinds to business investment could persist, whilst the offset from net trade remains underwhelming.”
All of these individual calculations and predictions are controversial, but producing estimates is a challenging task. However, what they show at this stage is that the Brexit vote has thus far left the country poorer and worse off, with the government’s negotiations with the EU threatening to make the situation even worse. Will Brexit look foolish in a decade’s time and is all of this a massive waste of time and money? Or is the price going to be worth it – will we see the ‘Brexit dream’ that campaigners and supporters believe in? Too many questions and not enough answers – and the clock is ticking faster than ever.