A deal by wealthy nations aimed at squeezing more taxes out of big multinational corporations could hit some companies hard while leaving others, including some of the most frequent targets of lawmakers' ire, relatively unscathed, a Reuters analysis found.
Finance ministers from the Group of Seven leading nations agreed on Saturday (12.04.2021) to proposals aimed at ensuring companies pay taxes in each country in which they operate rather than shifting profits to low-tax havens elsewhere.
One proposed measure would allow countries where customers are based to tax a larger share of a multinational company's profits above a certain threshold. Ministers also agreed on a second proposal, which would impose a minimum tax rate of 15% of profits in each foreign country where companies operate, regardless of the profit margin.
A Reuters review of Google owner Alphabet Inc’s corporate filings suggests the company could see its taxes rise by less than $600 million, or about 7% more than its $7.8 billion global tax bill in 2020, if both proposed measures were implemented. Google is among companies that some lawmakers have criticized for paying too little tax.
Meanwhile, medical group Johnson & Johnson, which is also based in the U.S., could see its tax bill rise by $50 billion, an increase of more than 1.780% on its global tax expense of $XNUMX billion last year, according to Reuters calculations.
Both Google and J&J declined to comment on the estimates.
In a statement on Saturday following the G7 agreement, Google spokesman Jose Castaneda said: “We strongly support the work being done to update international tax rules. We look forward to countries continuing to work together to ensure a balanced and lasting agreement is finalized soon.”
Determining the exact impact the new rules will have on businesses is difficult, in part because companies typically don’t disclose their income and tax payments by country. And key details about how the rules will be implemented are still pending, tax specialists say, including which countries profits would be reallocated to and the extent to which taxes generated by the new measures would offset taxes owed under the current system.
The proposed rules themselves also face hurdles. In the United States, several leading Republican politicians have voiced their opposition to the deal. Details of the agreement are also due to be discussed by the broader Group of 20 countries next month.
Four tax specialists agreed with Reuters' approach but noted there was still uncertainty about how the measures, including tax breaks included in the 15% minimum tax abroad, would be implemented.
The G7 comprises Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
“The deal ensures that the system is fair, so that the right companies pay the right taxes in the right places,” said a spokesman for the UK Treasury, which organised the G7 meeting. “The final details of the design and parameters of the rules are still to be worked out.”
be elaborated».
Sharing benefits
The first proposed measure targets large global companies that report at least a 10% profit margin globally. Countries in which the companies operate would be entitled to tax 20% of global profits above that threshold in an effort to prevent companies from declaring profits in tax havens where they do little business.
Applying that formula to Google could result in up to $540 million in additional taxes,
according to Reuters analysis.
Based on Google’s 2020 global profits of $48 billion, Reuters calculated how much of that revenue could be reallocated under the G7’s proposed formula. Reuters then calculated how much more the company would pay if that portion of revenue was taxed at a rate of 23% — which is the average tax rate for developed nations as identified by the Paris-based research body the Organization for Economic Cooperation and Development — rather than the 14% average overseas tax rate that Google said it paid last year.
Applying the same methodology to J&J, and its 2020 global earnings of $16.5 billion, the healthcare company would see its global tax bill increase by about $270 million as a result of the first measure.
The exact impact on each company's tax bill would depend on how much revenue is actually reallocated. Also at stake is the country from and to which the profits are moved, and therefore what the tax rate increase is. If all the reallocated profits come from nontax jurisdictions, the impact could be greater.
Minimum tax abroad
U.S. and British officials say the other measure, involving a 15% global minimum tax, will have a bigger overall impact on how much tax governments collect. But its effect on businesses will vary widely. In recent years, Google parent Alphabet, like some other targets of tax activists, has reorganized its international tax structures and last year reported more than three-quarters of its global revenue in the United States compared with less than half in each of the previous three years, according to its corporate filings.
Google reported $10.5 billion in profits outside the United States last year and an average overseas tax rate of 14%, which is one percentage point below the minimum tax proposed by the G7.
If Google’s overseas profits were all taxed at 15%, the additional tax owed would be $100 million. The impact could be greater if a large proportion of the money is earned in no-tax jurisdictions such as Bermuda, where Google used to report more than $10 billion a year in revenue. Conversely, the impact of the minimum tax would be reduced if the first measure prompted Google to reallocate some of its profits outside the United States and away from tax havens.
Excluding the impact of the first proposed measure, raising the tax rate on foreign income to 15% would mean $45 million in additional taxes.
The situation for J&J would be very different. It earned 76% of its 2020 revenue outside the United States and paid a 7% tax on that foreign profit on average. Applying a 15% tax rate to that figure of foreign income would result in $990 million in additional taxes, according to Reuters calculations.
While the reallocation of profits under the first measure would reduce this impact, the combined result of the two measures would be more than $1 billion.
Academics say that companies are adept at mitigating the impact of measures that are designed to reduce tax avoidance and so could reorganise to limit the impact of the proposed measures. And in reality, tax incentives offered by governments mean that companies may end up paying less in practice.
Source: Reuters
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