The UK hopes to collect more tax from multinationals and ensure the digital giants compete fairly with domestic companies following the “historic” G7 agreement at the weekend. But details about how much the government would raise and which companies would pay remain far from certain.
The Treasury has declined to publish its own estimates or indicative figures provided to it from the OECD, and all chancellor Rishi Sunak has said was that the deal was a “huge prize for British taxpayers” with a fairer tax system raising “more tax revenue from large multinationals”.
However, the details matter, said Sir Edward Troup, former head of HM Revenue & Customs, adding that at the moment, “we haven’t got a clue” exactly what the effects will be for countries and companies. The broad parameters are not quite as opaque however.
How will it change the way we tax big US-based multinationals?
This is pillar one of the international talks and would seek to replace the UK’s digital services tax, set to raise £700m annually by the middle of the decade.
There is no doubt that, for the UK, getting the likes of Google and Facebook to pay more of their global tax on profits to HMRC is the main prize in the negotiations. Britain has a large consumer market but is home to few global companies, so it hopes to raise money via this route.
Globally, however, this is a small part of the overall package, estimated by the OECD to raise only $5bn to $12bn a year, and few experts think there is likely to be a lot more revenue available. A lot will depend on the particular definition of profits and these are malleable, according to Judith Freedman, professor of tax law at Oxford university.
“It will be harder [for companies] to play games, but they will play games because there is no such thing as ‘true’ profit,” she said.
How much money will the global minimum corporate tax raise?
The proposed global minimum tax rate of “at least 15 per cent” is the big money-spinner for countries such as the US which wants to stop multinationals headquartered there shifting profits to tax havens and low tax jurisdictions such as Ireland.
For the UK, the benefits are much smaller because the UK already has some pretty strict anti-avoidance rules preventing domestic companies shifting profits abroad and is home to few global giants.
Having examined the published accounts of FTSE 100 and FTSE 250 companies, the law firm Clifford Chance said the likely additional government revenue from topping up large UK company profits to a global minimum tax rate of 15 per cent would depend on the exact rules but were likely to fall in a range of £900m to £5bn a year based on 2019 figures.
Dan Neidle, tax partner at Clifford Chance, said the upper estimate was “almost certainly too high” because it assumed 20 per cent of reported profits of UK-headquartered companies went untaxed around the world.
Mike Devereux, director of the Oxford university centre for business taxation, said that on any basis “if the chancellor wants more money, it’s easier to raise the corporate tax rate”.
What does this all mean for the Channel Islands?
The tax havens of Jersey and Guernsey in the English Channel are crown dependencies, but not part of the UK. The British government has an international responsibility to ensure the good governance of these territories but the islands have fiscal autonomy and deliver a good standard of living as low tax jurisdictions.
The islands say that the business done there is attracted by service quality and not tax rules and this claim will be tested by the new rules once they are agreed because companies which declare profits there will become liable to top-up taxation from the nations where they are headquartered.
“If the agreement goes through, [the Channel Islands] might still be attractive as places to do business, but not because of low tax rates,” Devereux said.
The UK government is unlikely to worry too much, however, if the islands find it harder to prosper in a new world, according to Troup. Rather than wanting to preserve their differential tax status, the former HMRC official described the Channel Islands as “an irritant” whose fate Whitehall cares little about.
Does this change anything for the UK’s plan for freeports?
This is one of the issues where the details matter. Sunak has offered enhanced capital allowances from UK corporation tax as a sweetener to the eight freeports he announced in the March Budget.
Companies making profits in the freeports will still be subject to UK corporation tax, but these tax breaks will lower the effective rate even if the headline rate remains the same.
The exact definition of the tax base and therefore the effective rate liable for the global minimum corporate tax has not been finalised, so it is unclear whether the system in UK freeports would fall below the global minimum and the advantages disappear after the introduction of the new system.
This is an example of why tax lawyers say it is vital that more details are forthcoming in addition to the one paragraph of text agreed by the G7.
Will the UK set a rate above the 15 per cent minimum, as Labour and some others want?
This is a decision for Sunak to take later. The G7 agreement said that countries will impose a minimum tax rate on the global profits of companies headquartered in their jurisdictions of “at least 15 per cent”.
Rachel Reeves, shadow chancellor, has criticised Sunak for not supporting a higher minimum of 21 per cent as the Biden administration originally suggested.
But as Devereux said, the important question about the 15 per cent rate is “15 per cent of what?” The UK will be free to set a higher rate, but will have to decide whether doing so gives UK-based companies a strong incentive ultimately to shift headquarters to another jurisdiction with a lower global rate.