No more tax havens: Big Tech must share profits

The clampdown on tax avoidance by multinational companies and global digital tech giants that has just been proposed by G7 nations promises the biggest overhaul of international tax rules. Some of the world’s most profitable trillion dollar companies, which have grown in revenues and earnings without paying much tax in many of the geographic locations they operate in, will now be forced to pay a global minimum tax of at least 15 per cent on their profits. The consensus among the richest nations now is that these multinational companies must be stopped from distributing most of their earnings to convenient tax havens around the world. A sweeping reform of the global tax system could be round the corner as G20, slated to meet in Italy in July and other global alliances like OECD are bound to see the logic in tax reform that could bring in an estimated $57 billion.

The Silicon Valley giants have been in the crosshairs lately for more than one reason, primarily to do with their oversized power in terms of riches and larger than life influence on the everyday lives of citizens around the world through their control of social media. This tax swoop on them was only to be anticipated. The new method of taxation will be based on where these profitable companies operate rather than where they are headquartered. The crux of the problem of how little they contribute to the local economy where they do business is illustrated in this example of the slim taxes they pay in the UK where Amazon paid £300 million tax on revenues of £14 billion in 2019 whereas even supermarket chains like Tesco and Asda paid much more.

Is it contrition or a game of smokes and mirrors that Amazon, Facebook and Google are playing in welcoming the tax reforms? The basic issue is a lot more complex as nations invite multinationals to do business on their soil with a host of tax breaks and other concessions in order to attract FDI dollars. While profitable manufacturing and services companies would expect to pay taxes in all the overseas jurisdictions they operate in, the same is not true of Big Tech czars of the new economy who are ruling the roost since the world transformed rapidly around the turn of the millennium to be predominantly tech-driven. Glaring discrepancies are highlighted now because returns from capital are currently taxed very differently depending on the business or industry and on what incentives nations offer to invite investment.

The depleted coffers of governments strapped for cash during the raging of the pandemic will benefit in the short term provided global standards of accounting are enforceable. To find a fair way to tax would be the trickiest part in this exercise. A theory on flat tax has it that all taxes should be merged into a single levy on all cash flows as they leave the corporates as in dividends or marked to reserves, etc. To forge an international agreement on all this is going to be a challenge as US tech giants are the ones which will be asked to cough up the most. To find the balance while aiming to fill the coffers is a global task for economists and accountants now.

Is it contrition or a game of smokes and mirrors that Amazon, Facebook and Google are playing in welcoming the tax reforms?