After decades of competition between states for international investment, multilateralism is back on the agenda.
Earlier this week, the G7 economies struck an historic deal aimed at making multinational companies pay more tax. G7 Finance Ministers agreed on a global minimum corporation tax rate of at least 15 per cent and that governments should have the right to apply this tax to multinationals in the locations where sales are generated.
Clearly, this policy is aimed at the global tech giants who, over the years, have become experts in navigating tax regimes to maximise profits. But will this multilateral approach achieve its desired objectives?
- In one door, out the other – On the face of it, this policy puts in place a safety net to stop MNEs safeguarding monies in tax havens. In reality, however, many governments may well find other ways to give the cash back to their largest investors. Given the footloose nature of big tech and the economic crises that many countries face post-COVID, the FAMGA crew are desirable clients for any major economy. No one is shutting the door on Messieurs Zuckerberg, Bezos or Pichai just yet… and in fact, if any of them tried to, would they end up being banned from their platforms as Trump has been? Or lose the right to share news on their platforms as Australia has?
- 139 more hurdles to navigate – Whilst the announcement from the G7 sets out a serious intent to reform global tax systems, the key forum in which such an initiative will be ratified globally is the Inclusive Framework. Set up in 2016 under the OECD, this group is made up of 139 countries and jurisdictions (all on an equal footing) who collectively decide the direction of the international tax system. Whether they will embrace the vision as positively as their G7 counterparts have remains to be seen. Indeed, China’s approval may be hard to secure given the implications this policy may have on Hong-Kong, one of the largest tax havens in the world.
- Amazon could actually swerve this one – Amazon has been one of the pandemic winners, achieving revenue of $386million in 2020 and a net profit increase of 84%. Crucially, as an online retail business, it runs a relatively low profit margin – only 6.3% in 2020. A key element of the G7 announcement was that the tax threshold would only apply to companies with profits exceeding a 10% margin. Despite holding the title of the world’s richest man, Bezos slips through the net again.
Since the 1980s, ruthless competition has driven globalisation: between companies seeking the greatest efficiencies and between countries vying for the multinationals’ affections. There have been winners and losers in this carnival of free enterprise, but perhaps the greatest winners have been the multinationals and the greatest losers, governments.
However, the pandemic has seen government intervene in ways never seen before. Increasingly countries are adopting similar policies and working together to identify global solutions. And as the US returns to the global community after its period in the wilderness, so too does our old friend, multilateralism. Yet this time it has some catching up to do. During its vacation, big tech got clever. Governments will need to wise up with more muscular and carefully coordinated displays of state intervention if they are to successfully extract large tax revenues from the giants. Individual states can no longer go it alone. From now on, they will be hunting in packs.