G7 Summit and Global Tax Reform
What is the G7 Summit?
“G7 Summit” might sound like a subplot in a franchise superhero film, but it actually describes an annual meeting of the “Group of Seven,” or the seven wealthiest democracies in the world (Japan, Britain, France, Germany, Italy, the United States, and Canada). The 47th G7 summit wrapped up over the weekend in Cornwall, UK. This year, the summit hosted discussions about international global tax reform, specifically for multinational digital companies like the ones that are currently open in the other tabs of your browser: Facebook, Amazon, Google, etc. The new reforms would potentially bring billions of dollars to governments in the wake of, to put it delicately, an economically challenging year - and also a year in which these digital companies managed to thrive and increase profits.
What are the suggested tax reforms?
The primary goals of the suggested tax reforms are to increase tax revenue from these multinational companies and demotivate the use of low-tax offshore havens by creating a uniform global corporate tax rate. The British Finance Minister Rishi Sunak described the reforms as an effort to make the tax system “fit for the global digital age,” explaining that many of the current laws were established in the 1920s before the Internet was even invented. These laws could not have anticipated products like smartphones, or services such as advertising platforms, let alone the more complicated digital industry generated by these companies.
What is a tax haven?
Because many of these multinational tech giants earn profit through services that are sold remotely, they attribute their profit to intellectual property generated in low-tax countries. In other words, a large company can purport that their services are generated in an offshore country with little-to-no income tax, thus paying less taxes while reaping profits across the globe in diverse, robust markets. The G7 Summit reforms suggested a uniform global tax rate of 15% (at a minimum) for companies above a certain profit threshold, so that the same tax rates apply regardless of where your services are produced - essentially rendering tax havens irrelevant. There was also discussion about environmental reforms at the summit, including restricting the use of coal for energy and whether companies should disclose their environmental impact to investors.
How’d everyone take it?
The conclusion of the summit was marked by positive cooperation amongst the Group of 7, but there is still a lot that would have to happen before any of the reforms are passed. The Group of 7 will present their reforms to a larger group of 20 countries (creatively named the “Group of 20”) in July, who will also have to agree on the reforms. The Biden administration will also have to pass them domestically in Congress. Some details that still need to be ironed out include how the tax revenues will be split between countries, what the profit margin cut-off will be for companies, and whether 15% is the appropriate tax rate (some countries, such as Ireland, feel it’s too high; while others, like France, feel it sets the bar too low). Treasury Secretary Janet Yellen says that the “unprecedented” and “significant” reforms would “ensure fairness for the middle class and working people in the US and around the world,” while critics of the reforms state they will “lead to more offshoring” and “make American companies less competitive than their international counterparts.”Spokespeople for the large tech corporations are largely speaking out in favor of the reforms on social media platforms.
Ethics and Taxes
Whether it’s ethical or not for these companies to be taking advantage of tax havens and striving to pay minimal taxes is up for debate. It really comes down to one’s personal ethical beliefs, and if you’re a glutton for chaos, we encourage you to bring it up at the Father’s Day cookout this weekend, and see what your in-laws think. It can be argued that the G7 summit reforms, which will be finalized later this year at the earliest (although that timeline is very ambitious and unlikely), aim to take personal ethics and opinion out of it. By changing the laws, the bottom line is that large digital companies will no longer be able to legally avoid paying a certain amount of taxes - or at least, not by way of tax havens. Disclaimer: We are legally obligated to remind you that the information shared in this article is for educational purposes only and should not be confused with personal investment or financial planning advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.Find us on: LinkedIn Facebook Yelp Twitter