G7 Summit: What You Need to Know About the Historic Global Tax Deal.

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The G7 summit takes place in Cornwall this June and aims to affect how large companies are taxed. For sole traders servicing larger, international organisations – the financial ramifications of less profit can trickle down into contracts, agreements, payment terms and more. What agreements are set to be made?

Most sole traders and small businesses should not be immediately affected by the latter part of the tax plan, as there is to be a set revenue threshold, but for the first aspect of the agreement it may be the case that some profits made overseas could be taxed. How this will affect providers such as therapists further down the management chain with regard to  clinic room rental costs and agreements, banking rates and fees, and provision of therapy services to larger providers is yet to be understood – although a rise in costs appears to be imminent.  

In the UK, British finance minister Rishi Sunak has been pushing for financial services within the City of London to be exempt from this new proposed global minimum corporation tax as he has raised concerns for a number of financial companies, who already pay a large amount in taxes, being unfairly charged and deterred from running their operations in London. Since Brexit, a lot of financial trading has moved out of the UK and into Amsterdam, and Sunak’s concern is that any further turbulence could dramatically affect the finance sector in the UK. 

First is the G7 Global Tax reform, in which the G7 aims to make companies pay more tax in countries they are operating and providing their services or product, rather than where they declare their profits. 

The reason for this is in part to deal with the challenge that international tech corporations such as Amazon present – as they operate globally, but have headquarters in countries that have relatively low tax rates where they declare their taxes. Paying the local rate of tax means less taxes on profits even if a majority of sales is made elsewhere. Although legal, the G7 intends to tackle this issue by setting up a global minimum tax rate. 

The minimum Global Tax that has been agreed upon by G7 finance ministers thus far is that multinational companies will pay 15% in each company that they operate within. This arrangement has been labelled “unfair” to smaller states by Oxfam’s executive director, Gabriela Bucher, as well as Alex Cobham, chief executive of the Tax Justice Network. As most large companies are likely to be headquartered within G7 states, these states are more likely to benefit from the new tax agreement. The G7 consists of Canada, France, Germany, Italy, Japan, the UK, the US and the EU’s high representative.

Under this new tax deal, each country will be able to collect the underpaid taxes of multinational companies within it, an example provided by The Guardian explains that if a UK company had operations in a country where the taxes were lower there than the minimum rate, it would impose an additional tax on the profits it makes to reach the minimum rate, for now agreed to be set upon 15%. 

The way that this will work is under this new tax agreement.  Countries will get a new right of taxation over a share of profits generated in their territory from companies headquartered overseas. Countries will be able to tax the source of a company’s revenue, such as sales of product or services regardless of the company’s physical location. 

In addition to this, a minimum corporation tax will be imposed by countries on overseas profits made by large companies headquartered in their jurisdiction. The minimum rate will only apply to multinational companies with revenues above a certain threshold, and that threshold is to be decided in the talks at the G7 summit this week. This corporation tax will be paid to the country where the company is geographically based.

Income sources such as drug patents, software and royalties will also be considered in this tax as it has been noted that intangible sources of income such as the ones listed above have been harder to track and therefore tax. 

There has not been an official list of which companies this new policy will effect as the criteria has not been finalised, however, it is estimated by The Organisation for Economic Co-operation and Development (OECD) that this policy would have brought in an additional £57bn in tax revenues each year were it approved.

Once talks between G7 countries have concluded over this week, the new plans need to be agreed upon by the larger G20 group of countries, which includes India, China, and Brazil, when they meet in Venice next month. Following an agreement there, the changes can be negotiated between 139 countries in a process overseen by The Organisation for Economic Cooperation Development. If all goes well there, the aim is that there will be a finalised agreement by October 2021. 

Current G7 talks are commencing from the 10th of June until the 13th, and are taking place in Cornwall, where topics such as the recovery from the pandemic, climate change, and the urgent need to vaccinate the world’s population will be under discussion.

In the interim, any therapists who are working with for, or in some way in another country, or are banking or investing abroad are advised to seek advice on the best way to protect income and assets before any official changes take place.

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Article written by Maisie Violet Wicks, BA Hons  and columnist for Private Practice Hub. Please contact newsdesk@privatepracticehub.co.uk for any enquiries, comments or corrections. 

References:

BBC News. 2021. G7 tax deal doesn’t go far enough, campaigners say. [online] Available at: <https://www.bbc.co.uk/news/world-57372682> [Accessed 8 June 2021].

Oecd-ilibrary.org. 2021. OECD iLibrary | Tax Challenges Arising from Digitalisation – Economic Impact Assessment: Inclusive Framework on BEPS. [online] Available at: <https://www.oecd-ilibrary.org/taxation/tax-challenges-arising-from-digitalisation-economic-impact-assessment_0e3cc2d4-en;jsessionid=ehaY21Uzu7o6UXJf9IxREciB.ip-10-240-5-167> [Accessed 8 June 2021].

Partington, R., 2021. G7 tax reform: what has been agreed and which companies will it affect?. [online] the Guardian. Available at: <https://www.theguardian.com/world/2021/jun/07/g7-tax-reform-what-has-been-agreed-and-which-companies-will-it-affect> [Accessed 10 June 2021].

Partington, R., 2021. Global corporation tax reform: what are the key issues in G7 negotiations?. [online] the Guardian. Available at: <https://www.theguardian.com/business/2021/jun/03/global-corporation-tax-reform-what-are-the-key-issues-in-g7-negotiations> [Accessed 8 June 2021].

euronews. 2021. The global minimum tax rate and what it means for multinationals. [online] Available at: <https://www.euronews.com/next/2021/06/05/the-g7-has-agreed-to-set-a-global-minimum-tax-rate-what-does-it-mean-and-how-will-it-work> [Accessed 8 June 2021].

Article written by Maisie Violet Wicks, BA Hons  and columnist for Private Practice Hub. Please contact newsdesk@privatepracticehub.co.uk for any enquiries, comments or corrections.