In the build-up to the budget three months ago, Labour formed an abortive plan to vote against Rishi Sunak’s increase in corporation tax from 19 per cent to 25 per cent, arguing that a pandemic was “not the time for tax rises”.
However, opposing higher taxes on big business provoked a bout of soul-searching on the opposition benches and, ultimately, Labour decided to back the rise. On Monday evening, though, the tables were turned.
Labour laid an amendment to the Finance Bill that called on the government to back President Joe Biden’s plan for a global minimum corporation tax rate of at least 15 per cent, and to publish how much the UK would collect from the proposal. The Tories voted it down. The old alignments are back; the Tories, the party of big business, and Labour the champion of the little man. At least that’s how Labour would like it to appear.
The politics may have been clever but it’s not so simple. Biden needs a global minimum rate if his plan to raise US corporation tax to 28 per cent is to be a success. That gives the UK leverage — both in discussions over tax paid in the UK by US tech giants and, according to sources in Europe, in ongoing trade talks. “They are not going to scuttle the ship as head of the G7 this year. They will fall into line,” one tax industry source said.
To understand what is going on, we need to rewind a few years. Global efforts to stamp out avoidance by multinationals have been under way since the Organisation for Economic Cooperation and Development clamped down on “base erosion and profit shifting” in 2013. Loopholes that allowed abuses like “double non-taxation” were closed but, in the end, BEPS did little more than tinker around the edges.
A proper fix required rewriting the international tax code for the digital age, specifically for companies like Facebook, Google, Amazon, Apple, Microsoft and Netflix. The internet’s long reach turns sales generated in the UK into profits in the US, where the tax is then collected. From the UK’s point of view, the problem is not that the company is avoiding tax, it is that America collects receipts that are by rights British because the activity took place in the UK. US dominance closed those talks down.
In 2018, however, the OECD saw an opening. As part of his tax reforms, President Donald Trump introduced a minimum US tax rate. If US companies used avoidance to reduce their overall tax rate below 10.5 per cent, they would have to pay the difference in the US. That raised a slim risk of companies moving their domicile. At the same time, France, Britain, Spain, India and other countries introduced digital sales taxes to capture some of the profits being swept back to the US. Trump retaliated by threatening trade sanctions. The tax wars had begun.
Global co-ordination was needed and, in early 2019, the OECD proposed a twin-pronged reform. “Pillar 1” was a new international tax code, replacing a century-old rulebook to address the issue of “taxing rights” — who gets to collect the tax. “Pillar 2” was a global minimum tax rate. Trump pushed for Pillar 2 but was not interested in Pillar 1. American companies should pay tax in America, was his position.
Biden’s election changed everything. His economic programme is funded by a huge tax increase on big business, in part by doubling the minimum rate to 21 per cent. But that increases the incentive to domicile overseas. A global minimum rate removes that. The OECD had been looking at a minimum global rate of 13 per cent but Biden pitched for 21 per cent. The organisation, which represents 137 countries in the negotiations, made it clear the rate was too high. Hence the current proposal of 15 per cent and a concession that the world’s largest 100 companies would be subject to new Pillar 1 rules on taxing rights, under which a formula apportions how much of a company’s profits should be paid overseas. Pillar 1 moves about $100 billion of tax largely from the US to other jurisdictions. At a rate of 15 per cent, Pillar 2 increases the total global pot of tax paid by more than $100 billion. The G7 now unanimously supports the plan, with one exception: the UK.
Sunak’s position is that digital tax reform is more important because it increases the pool of profits to tax, rather than increasing tax on the pre-existing pool. In that sense, it is new money. His digital services tax is due to raise £500 million a year from US tech companies and he wants to be sure that any Pillar 1 reform raises at least as much.
Having raised the corporation tax rate to 25 per cent, the Treasury also argues that a 15 per cent minimum tax will not raise an awful lot, perhaps even less than £500 million. Campaigners dispute that, saying UK multinationals often use avoidance to pay an effective rate below 15 per cent. The Tax Justice Network, an advocacy group, estimates that a 15 per cent minimum rate would raise $11 billion for the UK. The Treasury is refusing to reveal any numbers.
The suspicion is that the UK wants tax flexibility. The “patent box”, a preferential treatment for innovative companies, and the “super-deduction”, a relief on investment, show the UK is keen to use low rates of corporation tax as an economic tool. The Treasury rejects the idea, arguing that 15 per cent would still provide ample headroom for reliefs given the current corporation tax rate of 25 per cent.
Instead, the official line is that it wants US commitments on digital tax reform nailed down before losing its leverage in the negotiations, which is consistent with its long-standing position that digital tax reform takes priority. There is justification for holding the US’s feet to the fire. Pillar 1 is harder to agree, as it requires treaty change. A minimum tax rate is achievable simply through a “coalition of the willing”.
But the position is strangely at odds with France and Germany, who feel the existing commitments are sufficient. Ireland, which has a 12.5 percent corporation tax rate, is threatening to jeopardise talks. Finance minister Paschal Donohoe told Sky News that he had “significant reservations” about the plan.
Progress may be made at G7 meetings between finance ministers next week and an outline agreement is expected in the summer. “The UK is not going to hold this back. They are going to say, we played nice on tax, now let’s talk seriously on trade,” one tax insider said.
“We welcome the United States’ renewed commitment to tackling the issue and agree that minimum taxes might help to ensure businesses pay tax. However, it also matters where the tax is paid and any agreement must ensure digital businesses pay tax in the UK that reflects their economic activities.”