RUTH SUNDERLAND: Why this tax grab on global tech firms could backfire

RUTH SUNDERLAND: Why this tax grab on global tech companies could backfire

No wonder Rishi Sunak was wreathed in smiles as he announced G7 ministers had agreed on a global tech tax deal. The Chancellor, one of the big political winners of the pandemic so far, is understandably keen to parade yet another feather in his cap.

But the Treasury’s excitable claims that the G7 has struck a ‘seismic’ agreement that will ultimately put a stop to tax-swerving by the likes of Amazon are premature, to say the least.

It’s important to acknowledge there is a huge problem with tech giants and their propensity to wriggle out of paying much tax in the UK – and in some cases anywhere on the planet.

Take Amazon. The online retailer’s coffers have been swollen by billions of pounds of additional sales in Britain during Covid. Yet it has handed over only a minuscule percentage of that income to the Exchequer.

The Chancellor (pictured) , is understandably keen to parade yet another feather in his cap

This is not merely unfair, it is unsustainable at a time when we desperately need tax revenues to pump into the NHS, social care, education and other vital services.

But the G7 proposals, though manifestly well-intentioned, are a long way from being put into force. And even if they are, it is not at all clear they will have the desired effect.

Indeed, we have been here before. One of Rishi’s predecessors at Number 11, George Osborne, hailed an agreement against multinationals shunting profits into tax havens back in 2013, yet the scourge is with us still.

The latest proposals are for a global minimum corporate tax rate of 15 per cent and for multinationals to be obliged to share out a slice of their profits with the tax authorities in the countries where they operate.

George Osborne, hailed an agreement against multinationals shunting profits into tax havens back in 2013

The US has swung behind the deal largely for President Biden’s own domestic reasons. He wants to raise the rate of corporation tax to pay for his big spending plans on new infrastructure and education, and setting a global floor would deter companies from defecting to tax havens. 

However, the minimum rate plan is likely to face stiff opposition from Republicans. The system we have was designed for a very different era, when the world’s biggest companies had a physical presence and were therefore far easier to pin down and tax.

President Biden wants to raise the rate of corporation tax to pay for his big spending plans on new infrastructure and education,

The regime is no longer fit for purpose. But the idea the G7 has this weekend created a new one that will work in the weightless world of tech is wishful thinking.

Even if – and it’s a very big if – the changes are adopted worldwide, it is far from clear the new tax rules will achieve their aims. Reallocating a chunk of profit so it can be taxed in the countries where sales are made is likely to have limited impact. It would only apply to companies making a profit margin of at least ten per cent.

Some big tech giants make surprisingly little profit, and the figures can be massaged down, legitimately, through accounting adjustments.

Simply put, it might not result in the likes of Amazon paying much more.

The Treasury’s excitable claims that the G7 has struck a ‘seismic’ agreement that will ultimately put a stop to tax-swerving by the likes of Amazon are premature, to say the least

There could also be nasty unintended consequences. Inventive ideas here post-Brexit to use the tax system to pump growth could be kiboshed. Hopes, for example, of revitalising Red Wall areas through freeports, where businesses enjoy tax advantages, may be thrown into doubt if a minimum global rate becomes mandatory.

It would be wrong to be defeatist – it is in all our interests that tech giants are made to pay taxes that reflect the riches they reap.

But we should not fool ourselves into believing the hype that the problem is now solved.

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