Oh! Oh no!
Sorry, butter fingers.
Make sure you turn the scales on.
Alright how many have we got there? 2,000.
Yeah, we still have
a bit more to go.
Okay, a bit more to go. Fill them up, fill them up.
So why are we
filling up jars, Tom?
We’re trying to explain why a new global tax rate has
been agreed by some of the world’s biggest economies.
In June 2021, the leaders
of the countries that make
up the Group of Seven, otherwise known as the G-7,
endorsed a deal to make multinational
companies pay more tax.
Governments have been trying to solve the
challenge of taxing companies operating
across many countries for a long time, and that
challenge has only grown with the rise
of huge tech corporations.
Now don’t go over
because then we’ll
have to start taking them out.
Okay. Oh my god,
it’s so much pressure.
CNBC’s Silvia Amaro covers European politics
and macroeconomics. If she’s not in London,
you’re likely to find her in Brussels.
So, there’s a reason why
we’ve done this. I promise.
We’ve filled up this jar to 5,000 grams.
That’s because we are working on a conversion
rate of 1 gram to 10 million dollars.
So, if we’ve got 5,000 grams that is how much?
50 billion.
Correct, well-done Silvia.
So, $50 billion dollars is how much Amazon made in
revenue, in Europe, last year, in 2020.
But despite the record sales, Amazon’s European headquarters
in Luxembourg made a $1.4 billion loss and
therefore paid no corporation tax to the grand duchy. Other
big tech companies in recent years have also
paid little corporate tax.
Turnover for Facebook’s
U.K. outfit in 2019 was
$1.4 billion, and yet they paid $516
million in corporation tax.
In the 12 months ending
in June 2020, Google’s
turnover in the U.K. was $2.37 billion and they paid
less than $708 million in corporation tax.
So, now it’s your turn to
explain to us why that is
and how a new global tax rate is going to change that.
Facebook, Apple, Amazon, Netflix, Google and Microsoft
are some of the world’s biggest tech companies.
This graph shows their total revenue in the U.S. was more
than $4.6 trillion between 2010 and 2019.
Their declared profits were $1.1 trillion, and the tax
they paid was $180 billion – which means they paid a
16.2% tax rate during that time.
Given the U.S. had a 35% federal corporate income
tax rate for most of that decade, the gap in tax paid
with the expected headline rates is $155.3 billion.
What’s going
on here, Silvia?
Why aren’t these companies paying more in taxes?
Well, first all they are
paying the taxes they are
supposed to pay. The core problem here is that there
are different tax rates across the globe and when you are a
global company you have the means to change your
headquarters in a way that you pay less tax, and so it just
makes sense from an accounting perspective.
So, this new tax deal aims
to change things in two ways.
First companies will have to pay tax where they operate
and not just where they have their headquarters.
So that is a big change already, and then the second
thing here is that they want to implement a corporate
minimum tax rate of 15%. The idea there is to prevent
countries from undercutting one another.
One of the ways organizations can reduce their tax is
through corporate profit shifting.
This is where businesses set up their headquarters
and create local branches in countries with low
corporate tax rates and declare profits there.
For example, the U.K. has a corporate tax rate of 19%
so a business could move its headquarters from the U.K.
to the Isle of Man where there is a 0%
corporate tax rate. The company could then
book its profits in the Isle of Man and pay no tax
– even if the profits mainly come from sales made elsewhere.
To attract business and stay competitive, one country after
another after another have been making significant cuts
to their own rates, including members of the G-7.
For too long there has been
a global race to the bottom
for corporate taxes, where countries compete by
lowering their tax rates instead of the wellbeing
of their citizens and natural environments.
Corporate tax rates have
been in decline for decades.
In the last 40 years, the world’s biggest economies
have made significant cuts. The U.S. has reduced its
rates by more than 25%, the U.K. in excess of 30%
and Germany by a whopping 40%.
This has been a real
challenge, Tom.
On the one hand, as a nation, you want to attract
these big companies and essentially improve your
economic activity, but on the other hand you’re
competing with a lot of other countries who are
offering more attractive tax incentives and in the
end these companies have been really skilled at
manoeuvring these profits. A lot of people have
not been happy about that.
There are several popular
tax havens to shift profits
to, such as Malta, the Cayman Islands
and of course Ireland.
Apple, the world’s biggest company, chose the country
to be its European headquarters.
One report concluded
that it was the biggest
‘tax haven’ in the world, with foreign multinationals
shifting $106 billion of corporate profits to
Ireland in 2015 alone. The headline tax rate
in Ireland is 12.5%, but according to the report
the effective tax rate is around 5%.
While the new tax deal
aims to prevent the
shifting of profits to these low tax countries,
there are concerns that a large loophole could be
exploited by companies which run their business
at very low profit margins.
So a lot of detail has yet
to be worked out, including
which companies will actually be affected
by these new rules and there is a concern out
there that Amazon might not be impacted, simply
because the company has registered less than 10%
profit which is needed to be considered under
these new rules. However, the U.S. Treasury secretary Janet
Yellen has said that Amazon as well as Facebook will
qualify under these new rules.
Amazon says it has low profit
margins because it reinvests
significant sums into infrastructure and research,
adding that it complies with all local tax laws, amounting
in hundreds of millions of dollars in corporate tax paid
to European nations through other parts of the business.
Part of this G-7 deal seems
to be to prevent another
trade war, a trade war over digital taxes. Explain that.
Right, this is a very
interesting one because
the Communique that the finance ministers agreed
to does say that ultimately the idea is to remove all
digital services taxes that are in
place to avoid double taxation.
However, we’re not sure how this is going to work because
both Canada and the EU have said that they want,
nonetheless, to have their own digital taxes.
This could be a very tricky
issue from a political
perspective because we know that from the previous
administration that the U.S. has issues with the
idea of a digital tax, in the sense that most
of these digital companies are American and they don’t
want these firms to be disproportionately targeted.
In fact, under the presidency of Joe Biden, that policy
has not changed, even though we have to say that the tone
there is very different from
the previous administration.
Is there any
opposition to the deal?
There’s a lot of opposition to the deal in the sense that
some people say that 15% is not enough.
Others criticise the deal because it will only benefit
rich countries and not low-income nations and
ultimately there’s also a group of countries out
there who don’t like the idea that it’s these seven
countries that came up with this agreement.
They don’t want to be told what to do based
on a small number of nations.
To increase pressure on low tax countries, many
believe there needs to be a wider agreement
amongst the G-20. Collectively, the G-20
economies account for around 80 percent of
the world’s gross domestic product
and 75 percent of global trade.
The Organisation for Economic Cooperation and
Development estimated that a deal with wide-reaching
consensus could increase global corporate income tax
revenues by about 50 to 80 billion dollars per year.
The pandemic has left a
lot of these countries
that we’re talking about in a dire economic situation.
Has that been one of the driving forces in
getting this deal agreed?
Absolutely, well, first
of all it’s important to
point out that the deal is not totally completed.
We still need to see an agreement at the G-20 and
at the OECD, but definitely the
pandemic played a huge role here.
First because the economic shock was very severe across
the board and these big corporates were the ones
that profited the most from the pandemic in the sense
that most of us were at home, working from home and needed
these technology companies to work for us in a way.
And then the other thing that
I would point out is the U.S.
perspective is very interesting here as well because there was
a lot of social unrest in the United States, prior to the
election of Joe Biden. So when he arrived at
the White House, he knew he had to do something
about inequality and to address those social
concerns and what would be the best way to do that
than taxing big corporates.
It’s also important to bear in mind that the
Senate needs to approve the deal in its current
form and that could be a tough battle
for Joe Biden and his team.
Ultimately though we have
the seven most advanced
economies coming up with an agreement on global
corporate tax and that in itself is significant
because it does change the rhetoric and it does propel
the debate among international institutions on how to
move forward in terms of taxation.
Hold that, don’t drop it.
Ok, heavy.
Now take a look. Yeah.
How many coins do you
think is in the jar
and if you guess close to the right
answer you can keep it.
I’m going to
say, 5000?
Do you want another guess?
10,000?
No, you’re getting colder.
1,250. Only 1,250?
Yeah, you can
give it back to me.