Earlier this month, the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) announced a “historic deal” on international tax policy. It sets a minimum tax rate of 15 percent for multinational companies. She wants to stop the “global race to the bottom” in corporate taxes. Or at least to slow it down.
Before anyone falls into the “they raise taxes” hysteria, G7 corporate tax rates are currently between 19 percent in the UK and 32 percent in France. In the US it’s 21 percent.
This primarily refers to “statutory” tax rates – the rate that companies could pay in a world without creative accountants, expensive lawyers and lobbyists.
What do companies actually pay in taxes? Good question. There are no good answers. Nobody knows and everyone is lying.
Corporate taxes are no more public than private. However, corporate ID cards contain taxes paid and owed. At the end of 2019, the Institute on Taxation and Economic Policy (ITEP) published a study entitled Corporate Tax Avoidance in the First Year of the Trump Tax Law, which provides a comprehensive overview of the effective tax rates of profitable companies in 2018, ITEP- Researchers looked at the financial records of Fortune 500 companies and identified 379 companies that were profitable and provided enough information to calculate effective federal income tax rates. They found that these companies paid “an average federal effective income tax rate of 11.3 percent” just over half that “statutory tax rate” of 21 percent. They also found that 91 of these companies, including Amazon, Chevron, Halliburton, and IBM, paid no federal income tax at all. While another 56 companies “paid effective tax rates between 0 and 5 percent”.
These results aren’t unique to 2018. In 2020, 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 in 2020, according to Forbes.
It is very telling that the tax breaks identified in the ITEP report “are very concentrated in some very large corporations”. They also benefit the richest people in the world. They are part of the rigged system that allowed Jeff Bezos not to pay federal income taxes in 2007 and 2011, George Soros to pay no tax for three consecutive years from 2016 to 2018, and Michael Bloomberg to have a true tax rate of 1.30 percent between 2014 and 2018.
So, if the G7 proposal becomes an international agreement, will it fix “effective” tax rates?
It leans in that direction.
One of the great tax avoidance tricks – especially for really big companies – is to pretend the business they do in a country with reasonable tax rates is actually done in a country with below average tax rates. Imagine a product that is mainly sold in countries like the USA, Germany and Japan, but the profits from this product are – using accounting tricks – shifted to Ireland or Hungary.
If the G7 can get the rest of the world into its minimum 15 percent tax system, it will bridge the gap between the countries where goods and products are actually sold and those who advertise as “hiding places”.
In addition, according to the new G7 agreement, the “nations in which the company’s products are consumed have the right to tax 20 percent of profits with a margin of 10 percent or more”. This could make it difficult for large companies to avoid reasonable taxes by “relocating” their business to hidden countries.
However, large companies still have options not to be affected by this provision.
Amazon’s profit margin is expected to be 6.3 percent in 2020. For “retail” this is pretty normal. (Please note that this refers to net profit margin. A ratio of sales. Your gross profit margin, revenue from sales minus the cost of production, is about 40 percent.) In 2020, Amazon had sales of $ 386 billion with net income of $ 21.33 billion. But with that 6.3 percent “profit margin” you would be escaping the G7 determination.
The solution to this problem proposed by the G7 is to separate the sectors with high corporate net profit margins – like Amazon’s cloud computing services, up around 30 percent – from the low-margin retail stores. Tricky stuff indeed, but it shows awareness of the issues.
The G7’s “historic agreement” on international tax policy is much more an idea than an agreement. The seven countries in the group cannot solve this problem on their own. The agreement requires much broader participation. The intention now is to take it to the G20. This group includes some of the world’s major economies such as China, India, Russia, and Brazil. But not only the G7 heads of state and government have to have this plan approved at home. For example, can the Biden administration get this deal through a Republican Senate that has vowed to block everything and everyone it does?
The above short list of super billionaires who don’t pay taxes may have been a colorful detail. It’s more than that. It’s a statement about the contrast between nice statements and actual behavior. Bezos, Soros and Bloomberg have all advocated higher taxes for the rich and corporations. However, when it comes to action, they aggressively find ways to minimize their payments or, preferably, pay nothing at all. The formula is clear: use the best accountants to navigate the laws and find the loopholes, spend a lot of money on lawyers to fight to get it right, use lobbyists to get the laws through write in their favor and get non-enforcement when it doesn’t.
The intentions of the G7 proposal are excellent.
But corporations, “hiding” countries, and the super-rich will fight at every turn against these good intentions and for their profits.
So what is decisive is not the intention of the G7 agreement, but its application. And that’s at least a few more years in the future.
The views expressed in this article are the author’s own views and do not necessarily reflect the editorial stance of Al Jazeera.