10th June 2021
Top of the agenda at the 47th G7 Summit to be held from 11th – 13th June 2021 at Carbis Bay, St. Ives, Cornwall, will be the corporate tax rate changes that President Biden’s administration is keen to introduce internationally. The proposals will have a far-reaching effect on tax compliance and the income tax that organisations will have to pay. In this article, we examine the impact that these reforms will have on global taxation and compliance both in the UK and EU, as well at the implications for recruitment agencies placing international contractors.
The G7 summit
So, what are the proposals to be discussed at the summit of G7 countries (US, UK, France, Japan, Germany, Canada and Italy) and what is the US government trying to achieve? Firstly, President Biden and his advisers from the US Treasury Department want to introduce a standard global minimum corporation tax rate – 15% is the number which is being widely touted. According to recent research quoted in the Guardian, this could add in the region of €50bn or £43bn to the coffers of European countries.
The purpose of such a measure is to clamp down on what Treasury Secretary Janet Yellen had referred to as the “race to the bottom”. By setting a global tax rate, there will be a more equitable distribution of income tax revenues and will prevent organisations taking advantage of lower global tax rates. It is to counter ‘profit shifting’ which effectively diverts sales and revenues to a country or legislature that has a lower corporation tax rate. The way companies can do this is to set up a subsidiary in a tax haven such as the British Virgin Islands or Bermuda so that profits are booked in the low tax territory, thereby saving companies considerable tax revenues they would otherwise have had to pay.
The figures involved are huge and could end up costing companies millions. As the research reveals, this will hit some big British headquartered multinationals hard in the pocket. BP, the British oil and gas giant, would alone be paying almost €485m more in tax revenues according to estimates during what are already difficult financial times with Barclays Bank forecast to be paying in excess of €910m. These numbers are eclipsed by the mind-boggling €4.2bn that another global banking corporation, HSBC, would have to stump up.
Global tax news update for recruitment agencies
The measures proposed would allow countries to reap the benefits of taxation, ensuring that companies pay tax on where their income is earned. They would no longer be able to book profits in a country that offers them the lowest global tax rate, as set out in ‘pillar one’ of the OECD’s global tax blueprint. This added certainty would also be a great boon for countries, especially after the huge outlays, expenditure and debts that have been accumulated as a result of the pandemic. Biden’s proposal would therefore mean that profits would be recorded and taxed at the new minimum global tax rate, either where these profits were generated or where the company is headquartered.
The actual percentage rate for the global minimum tax rate has yet to be agreed. The Biden administration had initially set the mark at 21% but had then changed it to ‘at least’ 15%. Clearly each country has its own rate of corporation tax and there are concerns that some economic activity will be taxed elsewhere. The fundamental principle, though, is to ensure that global corporations pay a fairer amount of tax and that irrespective of where their taxes are paid, the global minimum will serve as a mechanism to create a more level playing field.
Gabriel Zucman, director of the EU tax observatory, explains the rationale behind the OECD’s ‘second pillar’ to ensure that countries don’t lose out in tax revenues, “But it doesn’t prevent the countries that want to be more ambitious to sign an agreement where they say for their own multinationals, ‘We’re going to impose a 25% minimum tax on their country by country profits so that even if they tax their profits in Ireland, Germany, the US, France, we are going to collect the missing 15% to arrive at 25%.”
Why recruiters need to stay up to date with tax legislation
As we’re seeing with the US driven proposals for a minimum global corporation tax rate, authorities around the world are looking to tighten their grip on tax compliance. And with ever more complex legal tax procedures to follow and get to grips with, it is crucial that recruitment agencies involved in the placing of international contractors are fully aware of the ramifications not only of these global reforms but also changes to local taxation and the effect on the recruitment of contract professionals.
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