With the tax pact between the world’s richest countries, governments are closer to regaining some power from the tech giants, who have used century-old systems to create wealth and outpace the economies of most nations.
Despite the agreement reached by the finance ministers in G7 Over the weekend, aiming to include all major multinationals, the current system particularly favors the technology sector. This is because its main assets – software code, patents, and other types of intellectual property – are relatively easy to adapt compared to physical assets.
As a result, companies like Facebook social networking site (FB), Amazon.com (AMZN) e The Google (The Google), from Alphabet, are paying less effective tax rates, much to the chagrin of European governments in particular.
The Covid-19 pandemic has reinforced this concern, with governments supporting traditional workers and businesses as the reach and wealth of tech giants expand while increasing demand for their services for shopping, entertainment, work and socializing at home. Without the ability to levy taxes, governments may be left without the revenues from reconstruction, but also without the ability to influence investment flows and economic development.
An analysis by Bloomberg Economics last month showed that the average tax rate for the world’s 50 largest companies fell from 35.5% in 1990 to 17.4% last year. Facebook (12.2%) and Amazon (11.8%) paid less than this rate in 2020.
In an effort to modernize practices for the digital age, Group of Seven finance ministers reached a deal on Saturday to push for a global minimum corporate tax of 15% and require big companies to pay more in the countries where they do business, rather than where they have headquarters.
The agreement lays the groundwork for negotiations in July by the G-20 and then for discussions between about 140 countries in coordination. Organization for economic cooperation and development. However, it will be up to each country to pass laws to implement any agreement: an even greater challenge if Republicans in Congress oppose the US president’s program, Joe Biden.
“This should mean an end to global digital taxes, which is great for tech companies,” said Andrew Silverman, government analyst at Bloomberg Intelligence. It also gives tech companies more certainty, which is just as important as lower taxes. Businesses can formulate how the tax will affect them and do tax planning. It is very difficult to respond to a mixture of digital taxes and trade disputes.
Tech companies have welcomed the proposal to standardize and reduce opacity as some governments, including France, the United Kingdom, Italy and India, have grown tired of multilateral debate and have adopted unilateral digital taxes in recent years.
“Amazon agrees to the tax agreement, because the implementation of random taxes in every country is unfair, wrong and creates distortions,” Mariangela Marseille, who is responsible for Amazon in Italy and Spain, said Monday. Facebook Vice President of Global Affairs Nick Clegg said the deal is an “important first step toward business certainty.”
These companies still have time before any changes take effect. The G7 deal did not say how the sequence would work. Countries such as France have insisted that they will not withdraw unilateral measures until they begin to reap revenue under a new system.
These agreements make clear that governments want to increase taxes paid by big tech companies, and this may be the case in all countries, including those that have not taken alternative measures at the national level.