Rishi Sunak on the eve of the G7 finance ministers meeting in London on Thursday
Rishi Sunak has used his first face-to-face meeting with the US Treasury Secretary Janet Yellen to demand a crackdown on big tech tax avoidance, as world leaders wrangle over the largest overhaul of international rules for decades.
The Chancellor is spearheading efforts by major European countries to ensure Silicon Valley pays tax where it does business, as part of a wider deal with the White House.
Mr Sunak last night called for concessions from Ms Yellen when they met in person for the first time ahead of a meeting of G7 finance ministers on Friday at Lancaster House in London.
The gathering represents a key test of Britain’s post-Brexit diplomatic clout and is being billed as a crucial moment for the future of relations between governments and business worldwide.
President Joe Biden is calling for a global minimum threshold for corporation tax set at between 15pc and 21pc, to stop companies shifting their profits to havens around the world.
US Treasury Secretary Janet Yellen has travelled to London for the G7 finance ministers meeting
Credit: TASOS KATOPODIS/EPA-EFE
Although Britain and other European countries are broadly in favour of the proposal, they have also insisted on a mechanism which ensures that tech companies pay their fair share in countries where they have large sales.
Treasury officials are concerned that major US businesses will book all their profits in America once the rules are changed, regardless of where they sell goods and services – potentially depriving the Exchequer of billions of pounds of revenue.
Mr Sunak will be heading to today’s talks with the goal of ensuring as big a proportion of tax as possible comes to the Treasury.
Haggling is now focused on a formula which will divide revenues between nations based on a combination of where economic activity takes place and where value is added in the chain of transactions.
Mr Sunak has been the most outspoken finance minister about the need to negotiate with the US, but is thought to have the backing of the French and Italian delegations.
Meanwhile, the US has put pressure on Britain over a digital services tax which the country adopted last year in the absence of wider international agreement. America is threatening new tariffs on its UK imports unless a compromise is found.
There is no guarantee a deal will be struck this weekend, but sources said they are hopeful of a joint statement setting out progress on Saturday.
If they do reach an agreement, it will not be the end of the process.
The G7 are significant economies but cannot by themselves secure a global deal.
Countries with serious concerns are likely to include Ireland – the Biden family’s ancestral homeland and a country close – and Hungary, because they compete on the global stage by keeping corporate tax rates low.
Developing economies that host significant international businesses in industries such as mining will also be reluctant to lose revenues to countries where those companies’ headquarters are located.
Mr Sunak said: “Even before holding the G7 Presidency we’ve been clear on our priorities – protecting jobs, ensuring a green and global recovery and supporting the world’s most vulnerable countries.
“Securing a global agreement on digital taxation has also been a key priority this year – we want companies to pay the right amount of tax in the right place, and I hope we can reach a fair deal with our partners.
“I’m determined we work together and unite to tackle the world’s most pressing economic challenges – and I’m hugely optimistic that we will deliver some concrete outcomes this weekend.”
Read on for our insight into the issues and opportunities surrounding the global corporate tax minimum and the UK’s battle to make Big Tech pay up.
Britain looks to turn the tables on US tech titans
Britain’s big moment is almost here.
World leaders are preparing to descend on Cornwall and London to discuss everything from Covid recovery to climate change and trade as part of the G7 summit.
High on the agenda will be global talks to revamp the international tax system and impose a worldwide minimum corporate rate.
Overhauling outdated tax rules, designed before the digital age, is both fashionable and valuable, with billions of pounds up for grabs every year.
But key details remain unresolved in the negotiations, with the UK remaining at odds over President Joe Biden’s proposal for a new global minimum corporation tax rate of 15pc.
What does Britain want?
Key for the UK, and allies such as France and Italy, is to get a bigger share of tax revenues from US companies.
Titans from Silicon Valley play an outsized role in the modern economy, but if they base their intellectual property in low-tax jurisdictions, then Britain, where the firms’ customers are based, gets little revenue.
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Under US plans for a global minimum corporate tax rate, companies could expect to pay more, but a big slice might end up in Washington.
Rishi Sunak wants to make sure the overhaul also changes the way profits are allocated geographically, to keep more cash in London.
“The global minimum tax basically means the tax is being paid at the HQ location which is unlikely to be in the UK,” says Chris Sanger, head of tax policy at EY.
“The UK is saying, we don’t just want these companies to pay tax somewhere, we want them to pay tax where their customers are, which is in the UK.”
Pressure is building because of the financial strains of the pandemic, says Melanie Reed, corporate tax partner at Moore Kingston Smith.
“Every country is trying to prop up their economy in terms of the support that has been given for Covid, so every Government is looking at their own coffers and deciding what they need,” she says.
What do taxes mean for tech companies?
The UK was among the first countries to force the issue by imposing a Digital Services Tax, a new levy on the world’s biggest technology giants.
Currently, this tax levies a 2pc charge on online marketplace sales, search advertising and social media for companies with over £500m in revenues.
It is expected to raise around £400m this year for the Treasury, on forecasts from the Office for Budget Responsibility, rising to £700m by 2024-25.
The UK’s ‘tech tax’ | Key facts
But the cost has not necessarily come straight out of the companies’ pockets.
Amazon simply pushed the 2pc cost of sales onto its third party sellers. Apple and Google also added new fees.
The UK promises the tax is only a temporary measure until a global deal can be struck.
But it has upped the ante in international talks, particularly riling the US which threatened retaliatory tariffs against nations which impose such a levy when the effects fall squarely on American businesses.
“UK attempts to tax tech have been a dismal failure,” says Richard Murphy, of Tax Research UK. He believes the UK position on a tech tax is likely to be “posturing, that is how these things work, with some give and some take”.
While Big Tech firms have resisted unilateral moves to impose new tech taxes, they have started to publicly nod through Biden’s new measures, even if private lobby groups push back.
In public, Jeff Bezos, Amazon’s chief executive, said in April: “We support the Biden administration’s focus on making investments in American infrastructure… we’re supportive of a rise in the corporate tax rate”.
US President Joe Biden earlier this week unveiled tariffs on UK goods worth £626m in retaliation for Britain's digital services tax.
Credit: Samuel Corum/POOL/EPA-EFE/Shutterstock
But lobby groups including Business Roundtable, a network of chief executives that includes Bezos and Apple’s Tim Cook, have hit out at rises, warning Biden’s planned 28pc rate in the US will weaken competitiveness and “slow America’s recovery and hurt workers”.
Biden’s move for a global 21pc tax, or even 15pc if critics can water it down, could force companies such as Microsoft, which on Thursday was revealed to have booked £220bn in profits via Bermuda while paying no tax, to at least stump up something.
However, Murphy notes that the impact of such a tax is unlikely to be material to the biggest technology firms. “All Biden is doing is saying they have to face up to paying a bit more. Will they suffer in the long term? No. Will it impact their share price? I doubt it.”
Can the deal be sealed this weekend?
Sanger says the problems this week are “not insurmountable”, but they represent only a starting point for changing the global system.
“The G7 is just one indication that success will occur at the OECD or the G20 or the 139 countries in the inclusive framework,” he says.
“The G7 itself is not the deciding factor – it is just a very good indication this will get wider support.”
Countries such as Ireland or Hungary, with relatively low rates of corporation tax, could object given this is a key part of their economic model.
Developing economies could be wary too, says George Bull, partner at RSM, particularly when they rely on foreign-based mining companies.
“Developing nations exporting raw materials have long been told they have a palace at the table [on tax talks]. I think some of those are becoming concerned that when the size of the tax cake and its slices are assessed, they may not get what they want,” he says.
Even once the overall framework is largely settled, the details will be tough to hammer out.
For instance, negotiators can expect long hours working out what to do if R&D tax incentives such as the UK’s patent box or the investment superdeduction take a company’s tax bill below the global minimum rate – when these policies are key to boosting growth and productivity in the economy.
All the while, Governments are aiming at a moving target as more of the economy goes digital.
“How does that impact on the allocation of revenues and where companies have a place of business?” says Reed.
“Two years ago you might have had a physical headquarters, but we don’t really need that any more, people can work from anywhere. And it muddies the waters in terms of where your customers are. The whole world has changed.”