Earlier this month, the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) announced an “historic agreement” on international tax policies. It sets a minimum 15 percent tax rate for multinational entities. It intends to stop “the global race to the bottom” in corporate tax. Or at least, to slow it down.
Before anyone goes into “they’re raising taxes” hysteria, the corporate tax rates of the G7 nations currently range from 19 percent in the UK to 32 percent in France. It’s 21 percent in the US.
More significantly, this refers to “statutory” tax rates – the rate companies might pay in a world without creative accountants, expensive attorneys and lobbyists.
What do corporations actually pay in taxes? Good question. There are no good answers. Nobody knows and everybody lies.
Corporate taxes are no more public than private ones are. However, corporate statements include taxes paid and owed. At the end of 2019, the Institute on Taxation and Economic Policy (ITEP) published a study titled Corporate Tax Avoidance in the First Year of the Trump Tax Law, providing a comprehensive overview of profitable corporations’ effective tax rates in 2018. For the study, ITEP researchers examined Fortune 500 companies’ financial filings and identified 379 companies that were profitable and that provided enough information to calculate effective federal income tax rates. They found that these companies paid “an average effective federal income tax rate of 11.3 percent” just a bit over half of that “statutory tax rate” of 21 percent. They also found that 91 of these companies, including Amazon, Chevron, Halliburton and IBM, did not pay any federal income tax at all. While an additional 56 companies “paid effective tax rates between 0 percent and 5 percent”.
These findings are not unique to 2018. In 2020, according to Forbes, 55 of the Fortune 500, including Nike, FedEx, Netflix, Molson Coors, Levi Strauss and Starbucks (with a profit of $4,774,000,000), paid no federal income tax.
It is very significant that the tax breaks identified in the ITEP report “are highly concentrated among a few very large corporations”. They also favour the richest individuals in the world. They’re part of the rigged system that allowed Jeff Bezos to pay zero federal income taxes in 2007 and 2011, George Soros to pay none for three years in a row from 2016 to 2018 and Michael Bloomberg having a 1.30 percent true tax rate between 2014 and 2018.
So, will the G7 proposal, if it becomes an international deal, fix “effective” tax rates?
It leans in that direction.
One of the big tax avoidance tricks – especially for really big companies – is to pretend that the business they’re doing in a country with reasonable tax rates is actually taking place in a nation with lower than average tax rates. Imagine a product that is largely sold in countries like the US, Germany, and Japan, but the profits from this product are – using accounting tricks – moved to Ireland or Hungary.
If the G7 can bring the rest of the world into their minimum 15 percent tax system, it will begin to close the gap between the countries where goods and products are actually sold and those that advertise themselves as “hidey-holes”.
Moreover, under the new G7 agreement, the “nations where the companies’ products are consumed would have the right to tax 20 percent of profits above a margin of 10 percent”. This could make it harder for large companies to avoid paying reasonable amounts of tax by “moving” their business to hidey-hole countries.
But large companies still have ways to avoid being affected by this provision.
For example, Amazon’s profit margin was said to be 6.3 percent in 2020. That’s fairly normal for “retail”. (Please note, this refers to net profit margin. A ratio to revenues. Their gross profit margin, income from sales minus cost of production, is about 40 percent.) In 2020, Amazon’s revenue was $386bn, with a net income of $21.33bn. But with that 6.3 percent “profit margin” they’d escape the G7’s provision.
The G7’s proposed solution to this problem is to look at the companies’ high net profit margin sectors – like Amazon’s cloud computing services, up at around 30 percent – separately from the low margin retail operations. Tricky stuff indeed, but it shows awareness of the problems.
The G7’s “historic agreement” on international tax policies is much more an idea than an agreement. The seven countries in the group cannot tackle this problem by themselves. The agreement needs much wider participation. The intent now is to take it to the G20. This group includes some of the world’s most significant economies, such as China, India, Russia and Brazil. But in addition to reaching out, the G7 leaders also need to get this plan approved at home. Can the Biden administration, for example, get this agreement through a Republican Senate which has vowed to block anything and everything it does?
The brief list above of super-billionaires not paying taxes might appear to have been a colourful detail. It’s more than that. It’s a statement about the contrast between making nice statements and actual conduct. Bezos, Soros and Bloomberg have all made statements in support of higher taxes on the rich and corporations. However, when it comes to action, they aggressively find ways to minimise what they pay, or preferably, avoid paying anything at all. The formula is clear: use the best accountants to navigate the laws and find the loopholes, spend lavishly on lawyers to fight to make that right, use lobbyists to write the laws in their favour and achieve non-enforcement when they’re not.
The intentions of the G7 proposal are excellent.
But companies, “hidey-hole” countries and the super rich will fight against these good intentions and for their profits every step of the way.
So what matters is not the intent of the G7 agreement, but its application. And that is still at least a few years in the future.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.