The G7 Tax Proposal — What it Means for Big Tech

  • Big tech companies (combined cash balance: >USD580bn 1) have paid lower taxes by incorporating in tax havens where corporate tax rates range from 0% to 17% as opposed to tax rates of more than 20% in the countries in which they were initially founded.
  • Apple, Facebook, Twitter and Microsoft have their international headquarters registered in Dublin, Ireland, where the tax rate is 12.5%. Effective tax rates for Amazon, Facebook and Apple were only 11.8%, 12.2% and 14.4%, respectively 2, in FY 2020 — much lower than the 21% corporate tax rate in the US.
  • G20 countries asked Organization for Economic Co-operation and Development (OECD) nations to address this disparity in 2013–15. Base Erosion and Profit Shifting (BEPS) strategies were subsequently introduced to ensure uniformity and certainty in the international tax system.
  • In June 2021, the G7 countries agreed to tax the top 100 companies globally, irrespective of the place of incorporation, and are looking at setting up a framework to check tax arbitrage.

Need to change archaic tax laws

The G7 corporate tax deal — the background and details

The deal is based on two pillars:

Implications

  • An additional USD275bn 3of tax revenue could be earned under the proposed minimum corporate tax rate — 61% of this would accrue to the G7 nations; the US would earn 50% of this.
  • With limited tax arbitrage, capital could flow back to (or accumulate in) the countries where the multinationals have a strong business presence.
  • In the long term, measures such as infrastructure, favourable regulation and rule of law, and quality of workforce would be the key factors attracting foreign direct investment (FDI).

Conclusion and key takeaways

  • Timing and the way forward: The backing of the G7 nations has provided a definitive step towards reforming the international tax structure. The tax proposal will be discussed next at the G20 meeting in October 2021.
  • Tech companies: In the current form, the impact on tech companies is not significant. For instance, the top 15 companies in the US are subject to an effective tax rate of c.14% 4. Under the new tax reform, we estimate that the effective tax rate will increase by 300–400bps 5, as some of the tax increase will be offset by the withdrawal of the DST. The minimum tax rate of 15% is only marginally higher than Ireland’s current tax rate of 12.5%.

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