How to view the “historical” G7 tax agreement?Business and economy

Earlier this month, the Group of Seven (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) announced a “historical agreement” on international taxation policies. It sets a minimum tax rate of 15% for multinational entities. It intends to stop the “global race to the bottom” of corporate taxes. Or at least, let it slow down.

Before anyone falls into the hysteria that “they are raising taxes”, corporate tax rates in G7 countries currently range from 19% in the UK to 32% in France. In the United States it is 21%.

More importantly, this refers to the “statutory” tax rate—the tax rate a company might pay in a world without creative accountants, expensive lawyers, and lobbyists.

How much tax does the company actually pay? good question. There is no good answer. No one knows, everyone is lying.

Corporate tax is not more public than private tax. However, the company report includes paid and owed taxes. At the end of 2019, the Institute of Taxation and Economic Policy (ITEP) published a study entitled “Corporate Tax Avoidance in the First Year of the Trump Tax Law”, which gave a comprehensive overview of the effective tax rate of profitable companies in 2018. , ITEP researchers examined the financial documents of Fortune 500 companies and identified 379 profitable companies that provided enough information to calculate effective federal income tax rates. They found that the “average effective federal income tax rate” paid by these companies was 11.3%, which was only slightly higher than half of the “statutory tax rate” of 21%. They also found that 91 companies including Amazon, Chevron, Halliburton and IBM did not pay any federal income tax at all. The other 56 companies “paid effective tax rates ranging from 0% to 5%”.

These findings are not unique to 2018. According to Forbes, 55 of the 2020 Fortune 500, including Nike, FedEx, Netflix, Molson Coors, Levi Strauss, and Starbucks (with a profit of $4,774,000,000), have not paid federal income tax.

It is very important that the tax relief identified in the ITEP report is “highly concentrated in a few very large companies.” They also prefer the richest people in the world. They are part of the manipulation system that allowed Jeff Bezos to pay zero federal income tax in 2007 and 2011, George Soros did not pay federal income tax for three consecutive years from 2016 to 2018, and Michael Bloom Berg’s real tax rate between 2014 and 2018 was 1.30%.

So, if the G7 proposal becomes an international agreement, will it determine the “effective” tax rate?

It tilts in that direction.

One of the biggest tax avoidance techniques—especially for truly large companies—is to pretend that their business in a country with reasonable tax rates is actually conducted in a country with a tax rate below the average. Imagine a product that is mainly sold in countries such as the United States, Germany, and Japan, but the profits of the product—using accounting techniques—are transferred to Ireland or Hungary.

If the G7 can include the rest of the world in its tax system of the lowest 15%, it will begin to narrow the gap between the countries that actually sell goods and products and those that advertise themselves as “hiding places.”

In addition, according to the new G7 agreement, “countries that consume company products will have the right to impose more than 10% of profits on 20% of profits”. This may make it more difficult for large companies to avoid paying reasonable taxes by “transferring” their business to hidden countries.

But large companies still have ways to avoid being affected by this regulation.

For example, Amazon is said to have a profit margin of 6.3% in 2020. This is quite normal for “retail”. (Please note that this refers to the net profit margin. The ratio to revenue. Their gross margin, that is, sales revenue minus production costs, is about 40%.) In 2020, Amazon’s revenue is $386 billion and net profit is 21.33 With a billion dollars but with a “profit margin” of 6.3%, they can escape the G7 regulations.

The solution proposed by G7 to solve this problem is to separate the company’s high net profit margin industry from the low profit margin retail business, such as Amazon’s cloud computing service, which is as high as 30%. It is indeed a tricky thing, but it shows an understanding of the problem.

G7 The “historical agreement” on international tax policy is not so much an agreement as it is an idea. The seven countries in the group cannot solve this problem alone. The agreement requires wider participation. The intention now is to bring it to G20. This group includes some of the most important economies in the world, such as China, India, Russia, and Brazil. But in addition to extending a helping hand, G7 leaders also need to obtain domestic approval for the plan. For example, can the Biden administration reach this agreement through the Republican Senate, which has vowed to stop anything it does?

The short list of superbillionaires who do not pay taxes above seems to be a colorful detail. Not only that. This is a statement about the contrast between making a beautiful statement and actual behavior. Bezos, Soros and Bloomberg all issued statements in support of higher taxes on the rich and companies. However, when it comes to action, they will actively look for ways to minimize the expenses they pay, or it is better to avoid paying any expenses altogether. The formula is clear: use the best accountants to browse the law and find loopholes, spend a lot of money on lawyers to fight for this, use lobbyists to make laws that are beneficial to them, and implement them without enforcement.​​ Not executed.

The intent of the G7 proposal is excellent.

But companies, “hiding place” countries, and the super-rich will fight these goodwill and profits at every step.

So the important thing is not the intent of the G7 protocol, but its application. And this will take at least a few years.

The views expressed in this article are those of the author and do not necessarily reflect Al Jazeera’s editorial stance.