Remember how last month the UK Chancellor of the Exchequer Rishi Sunak was busy taking the credit for beating the G7 nations into agreeing to a global minimum rate of taxation for multi-nationals AKA making the likes of Amazon pay more tax?
At the time, diginomica was skeptical about how this would translate from expedient PR conveniently co-inciding with the UK hosting the G7 Summit into practical reality. There were a lot of more countries to convince before this would be workable, we suggested. More than that, we suspected that this would be another example of what we’ve seen in standards organizations for decades - everyone dutifully talking about co-operation and the greater good for public consumption and then fighting like a bag of cats as soon as there’s any money to made.
In this instance, there are a lot of countries for whom a global tax rate just isn’t in their commercial interests. It was just a question of which one would take the lead and show their hand first. Now we know - Ireland has vocally broken ranks with both Brussels and Washington and says it wants nothing to do with a scheme that would actually raise its level of corporation tax that’s been kept seductively low at 12.5% in order to woo lots of lucrative inward investment, particularly from large tech firms such as Amazon, Microsoft and Salesforce among others.
Now, it should be said at this point that 130 countries, representing more than 90% of global GDP, have said that they will sign up to the new arrangements. But if a handful of states refuse and continue to undercut the rest, it’s only a matter of time before others decide to join them, surely?
Ireland’s position is also awkward from the European Union’s point of view. Earlier this month the bloc announced it was suspending its own tax initiative in order to make it easier to achieve what is called "the last mile" of the international deal. It also avoids any more unpleasantness from Washington where the Biden administration has talked just as tough as Trump did about tariffs and trade wars if the Europeans went ahead with what was seen as an anti-US tech firm tax regime.
Nine other countries, including Estonia, Hungary, Nigeria and Barbados, have also opposed the move, but Ireland is the most outspoken to date and making no secret of the self-interest it’s pursuing.
Ireland's Deputy Prime Minister Leo Varadkar has gone so far as to claim that the proposed global rate is actually all about "big countries trying to get a bigger share of the pie”, including Ireland's EU partners. He’s said:
We've taken about €10 billion a year in corporation profit tax, double what the average European country does per head. It’s one of those examples of where low taxes result in higher revenues, in a world where wealth capital, labour, corporations are very mobile.
Finance minister, Paschal Donohoe meanwhile has pitched the 12.5% tax rate as a “key feature of our economic policy now for decades” and says of the proposed reform:
What is on the table is an agreement that we cannot be part of…[it] does not have the certainty or precision that is needed for this country to make an evaluation about what to do. So, whether we’re in the final agreement or not will depend on the detail.
He’s also pointed to the inclusion of so-called carve-outs on how companies can cut their tax bills in other ways, such R&D offsets:
It is issues like what the base would be. It is issues like what the rate would be. There is language in the current agreement in relation to the scope of carve-outs, but that language is at the moment still caveated.
Now on that point, he’s got a point. There’s a strong suspicion that the new tax regime won’t see US multi-nationals paying a lot more tax outside of America, certainly not to the extent that the likes of France would like to see. US Treasury Secretary Janet Yellen has already started being alarmingly ‘flexible’ about whether Amazon will be impacted by the new regime, telling CNBC:
It depends on whether or not they hit the profit margin threshold, and I’m not sure about that.
Hmmm…if all of this isn’t about screwing the likes of Amazon into paying more tax more evenly, then, again, many non-US countries are like to raise a dubious eyebrow about why they’re going along with this exercise.
Meanwhile Yellen has urged all 27 EU states to sign up to the new regime:
We need sustainable sources of revenue that do not rely on further taxing workers' wages and exacerbating the economic disparities that we are all committed to reducing. We need to put an end to corporations shifting capital income to low tax jurisdictions, and to accounting gimmicks that allow them to avoid paying their fair share.
So Ireland’s dissidence isn’t helpful. But there’s another problem here. You don’t get any points in American politics for being critical of the Irish. Hence, Yellen was diplomatic when questioned on the subject last week:
For Ireland, low taxes has been an economic strategy that has been incredibly successful. They see it as very vital to their economic success. And I think to go along with it, probably they need to be able to make the case that it’s in the interest of the country.
Washington needs Brussels to get Ireland to play ball. But Brussels has its own Irish agenda to manage. Brexit has seen Ireland and the Irish border with Northern Ireland and mainland Britain in particular, become a political stick with which to beat the UK government in Westminster. Ireland needs to be supported at all costs and at all times is the message coming out of the European Commission, so now’s really not the time to be having to issue threats or sanctions to bring it into line with what Brussels wants on the subject of tax.
It’s a difficult circle to square and one might be forgiven for thinking that for the Brexit Britain government, Ireland’s refusal to play ball suits it quite nicely. And if the impasse continues, it frees up the UK to back away itself and set its own level of low corporation tax and be able to argue that it had tried to go along with the global plan, hadn’t it? For the time being that won’t happen - the UK still needs that post-Brexit free trade deal with the US and until that’s signed, there can’t be too much done to upset Joe Biden. But...
Still, everyone had a lovely time at the G7 Summit and the PR photoshoots and headlines were terrific. Just don’t, as we said at the time, assume that the tax issue is a done deal. That bag of cats is fighting all the harder.