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The Beginning of the End of Sovereign Taxation?

With the debt from COVID-19 still mounting, it is clear that funds are needed and they must be raised from somewhere. Who better to help fill the void than those global tech giants...

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Date: 11/06/2021

Authors:

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Neal Todd

Partner
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Gemma Grunewald

Associate

With the debt from COVID-19 still mounting, it is clear that funds are needed and they must be raised from somewhere. Who better to help fill the void than those global tech giants who have profited so much over the past 15 months?

Although the G7’s tax deal is likely to increase the pennies in the Treasury in the immediate term, it will undoubtedly further cloud an already difficult tax code – adding international complexity to vast sovereign legislation. In addition, it will remove the power of future UK governments to steadily reduce the UK corporation tax rate to lure multinational businesses – albeit a clear aim of the initiative but one that may not be prudent for the UK to sign up to for life.

What have the G7 agreed?

The deal is formed of two pillars.

First, companies with profit margins in excess of 10% will be required to pay a percentage of their profits in markets where they make large sales despite minimal corporate presence. The aim of this limb is to make those organisations which base their headquarters in low tax jurisdictions, whilst trading with consumers across the globe, pay their fair share of tax.

Second, a global minimum corporation tax rate of “at least 15 per cent” will be applied to institute a floor on corporation tax rates across the world.

What does it mean?

As with most new initiatives, the devil will be in the detail and we can only wait to see how the negotiations with the G20 and later the OECD nations progress.

At this stage it is unclear whether some businesses would be able to rejig their operations to offset profits against loss-making structures to remain under the 10% profit margin threshold. What is clear is that any new legislation is likely to result in considerably more onerous reporting for the companies involved and open the way for strife between tax authorities competing over their share of the pie.

As with other targeted legislation before it, it remains to be seen whether this new deal will level the field with bricks-and-mortar and raise much-needed funds, or simply add complexity without much long-term revenue.

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