There’s a beauty and charm to Cornwall that’s beguiling. Rooted at the very southwest of the United Kingdom, its rugged coastline pointing forever west towards a setting sun, and small coves and fishing villages make it Britain’s favourite summer getaway spot — so much so that there’s a growing anger among locals against the owners of second homes who have driven prices through the roof and making it unaffordable for many.
In centuries past, those coves were favoured by smugglers, landing goods and chattels by the darkness of night to avoid customs taxes and duties that should be paid to the Crown.
Rather apt then that it is here that the Group of Seven leaders will meet this weekend, rubber stamping an agreement reached by their finance ministers to back a global corporate tax rate of 15 per cent.
As many a Cornish smuggler would have uttered in times past, good luck trying to implement it, never mind collect it. It’s one thing for the leaders of the US, Japan, China, the UK, Germany, France and Canada to reach an agreement on creating a level tax playing field, another to actually have it implemented across the board. Even with the 27 nations of the European Union, there’s little chance it will take effect — and certainly not as far as Ireland, Cyprus and Hungary are concerned.
Need to recoup revenues
The G7 finance ministers agreed a series of joint proposals that would revamp how the biggest companies are taxed worldwide. With coronavirus having caused governments around the world to spend, spend and spend on public health measures at a time when economies were in deep freeze and tax revenues moribund, there’s a need now to recoup revenues and find new streams to pay for the pandemic.
And those tech giants that are household names — Google, Amazon, Facebook, Microsoft, Apple — use the global corporate loopholes available to them to ensure they pay as little tax as possible.
Let’s be clear on one thing, the companies themselves are only using the existing structures to minimise their tax liabilities, structures that have long been in place around the world, and structures that have long been ignored by the G7. But that was before COVID-19. Now, the need for tax revenues means the G7 would like to have those companies pay billions into national coffers to recoup pandemic spending.
A deliberate ploy
EU nations such as Ireland and Cyprus have long enticed multinational corporations to their shores, offering generous tax regimes and low corporate taxes. It’s a very deliberate ploy. While corporate entities pay little taxes, they create thousands of well-paying jobs for employees, who contribute back with their payroll taxes.
In the past month, for example, the Irish subsidiary of Microsoft made a profit of $315 billion (Dh1.156 trillion) last year but paid no corporation tax as it is “resident” for tax purposes in Bermuda. The profit generated by Microsoft Round Island One is equal to nearly three-quarters of Ireland’s gross domestic product — even though that company has no employees.
The subsidiary, which collects license fees for the use of copyrighted Microsoft software around the world, recorded an annual profit of $314.7 billion in the year ending June 2020. Ireland’ GDP in 2020 amounted to €357 billion.
On the face of it, that’s quite a tax scheme. But Mircosoft’s other divisions employ some 2,000 in Dublin — and they all pay taxes.
The G7 reforms on corporate tax have been long championed by European countries such as France and Germany, and it received a new momentum after US President Joe Biden took office in January and made it a priority. Now the G7 reforms will be taken up by the G20 which is due to meet in Venice next month.
But the low corporate tax companies — Hungary has just introduced a 9 per cent company rate to stimulate growth — are standing firm.
Matter of national competence
Within the EU and in EU parlance, tax is a matter of national competence. Basically, as far as they concerned, they can set their own national policies when it comes to taxation — regardless of what the G7 may decide — and they are willing to take the fight to the OECD — the Organisation for Economic Cooperation and Development — for good measure.
“There are 139 countries at the table, and any agreement will have to meet the needs of small and large countries, developed and developing,” Paschal Donohoe, Ireland’s feisty finance minister tweeted just after the G7 announced their agreement. “It is in everyone’s interest to achieve a sustainable, ambitious and equitable agreement on the international tax architecture.”
Ireland is well used to fighting others when it comes to corporate taxes, and the smaller nations in the EU generally agree with the Irish point of view. It’s one reason why, for example, Brussels was unable to create a digital tax aimed at the big tech companies back in 2019 — and why governments in Paris Rome and Madrid brought in their own tax measures on the tech giants.
The way the EU decision-making process is structured, the large nations such as France and Germany need the support of smaller nations to reform and forge the bigger picture of the bloc. But there’s also a danger that if those little members feel too pushed and shoved, they can and do fight back — making it far more difficult to build consensus, slowing the rate of reforms.
And corporate tax, where the little nations set their own policies to grow their own economies, is likely a bridge too far. The G7 is one thing. The EU 27 another. That smuggler culture is still thriving.