Global tax reform is bringing the conflicted incentives of post-Brexit Britain out into the open.
When the Biden administration took the unprecedented step earlier this year of floating a global minimum business tax rate of 21%, U.K. Chancellor of the Exchequer Rishi Sunak and his team took a dim view. The Brits saw the rate as too high — despite Sunak’s own plans to lift U.K. corporation tax to 25% — and not geared toward getting tech firms such as Amazon.com Inc. to pay their fair share around the world.
Now that the G-7 has agreed to a 15% minimum rate and a new tax on multinational profits that gives countries a crack at collecting more, Sunak’s team still isn’t happy, according to the Financial Times. They want an exemption for financial services, including global banks with their head offices in London such as HSBC Holdings Plc. The U.K. will keep pushing its case as talks move to the G-20 level.
Banks weren’t intended to be the primary target of reforms designed to bring the global tax system into the digital age. Under earlier proposals, finance, along with airlines, energy companies and other industries, was supposed to be exempt, according to a French parliamentary report. On that basis, you could argue the U.K. might be trying to pull the bedcovers back a little from the Biden administration.
However this mixture of resistance and contradiction — or “evasion and sophistry,” as some tax campaigners have put it — is becoming a habit for the U.K. It’s not going to help build consensus around this tax deal beyond the G-7.
The specific worry here is less the existing tax rate of City of London firms — 19 out of 20 top Western European and U.S. financial companies paid an effective tax rate of above 15% in 2019, according to Bloomberg News — more who gets to tax them. By reallocating taxable profits to better align with where value is created, the U.K. could lose a slice of tax revenue.
Still, the adjustment for the finance industry would probably be small. Richard Murphy, director of Tax Research U.K., estimated a potential 174 million-pound ($246 million) reallocation for a bank like Barclays, or 0.8% of revenue. “Sunak is fussing about not a lot,” he wrote.
But there’s a bigger picture here. The U.K. is grappling with a post-Brexit London that’s anxious to prove it can still attract multinational corporations amid pandemic pressures that have pushed government borrowing to a peace-time record and worsened trade ties with the continent.
In March, as part of a Covid-19 budget plan, Sunak promised to increase the corporation tax to 25% from 19%, but not for another two years, if the plan goes into effect at all. He has simultaneously been at pains to promise “lots of goodies” to attract foreign investment. They include the creation of eight low-tariff, low-tax “free port” business zones, which Transparency International has called a major money-laundering risk unless proper oversight is set up to avoid corruption.
The divorce from the European Union has added to the pressure to deliver on these perks, or indeed any “Brexit dividend” at all, given the loss of unfettered access to the bloc’s single market that has chased away financial-sector assets and jobs and thrown trade across the Irish Sea into disarray. The government has even roped in an external adviser to identify Brexit opportunities.
Against this backdrop, and with advertising mogul Martin Sorrell’s 2019 cry for a “Singapore on steroids” still fresh in the mind, the U.K.’s fellow rich countries are likely to bristle at a City carve-out.
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Rather than lead a vanguard of resistance against global tax reform in the name of the financial sector, the U.K. should focus on the hard task of ensuring the current proposals will work as intended against the elusive taxable profits of Big Tech. Already one big hurdle has emerged: Amazon.com Inc.’s estimated operating margin of below 10% this year would technically put it beyond the reach of the new rules.
Convincing the world to tighten that noose will be hard enough without asking for City perks in return. The G-7 deal needs more carve-ins, not carve-outs.
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