The proposal aims at companies with profit margins of more than 10 per cent. In the tech sector it would apply to the likes of Facebook, Google, Microsoft and Apple. It may not apply to Amazon as the company’s online shopping margins can be below the threshold.
Companies will pay taxes in the country where they make revenue.
The idea is that this will put a stop to the practice of companies billing all their New Zealand revenue through an Irish subsidiary. Big companies shift income to lower tax countries to avoid paying higher rates of tax.
Digital service tax
There is also a plan to abolish digital service taxes.
Countries use these to tax services like digital streaming. A firm might deliver this from overseas, collecting revenue in the consuming country.
Governments have used these taxes to get money from companies that otherwise bypass traditional collection mechanisms.
America, Canada, Britain, France, Italy, Germany and Japan make up the G7. The European Union is taking part in the meetings as a guest.
While these are large economies and make up a hefty slice of the world’s total, the tax reforms are unlikely to work unless other countries sign up. Australia, India, South Korea and South Africa will take part in the next round of meetings. Later the proposal will go to the G20.
Critics of the proposal say that a 15 per cent tax rate is too low. It is lower than the company tax rate in many countries that are likely to sign up to the project.
No doubt the target companies will have teams of tax lawyers looking for loopholes.
There are plenty of complications. At his blog, Bernard Hickey points out the European and US governments are talking about different aspects.
They could be talking past each other.
It looks as if the proposal is a better deal for America than other nations. It is, after all, the home of many tech giants. Hickey says the losers will be tax havens. He suggests New Zealand could be more than $300 million a year better off.
Sometimes with projects like this, it’s important to establish the idea that these large companies pay any tax. From there, governments can make on to make sure they pay enough. Either way, this isn’t going to happen overnight and may not happen at all.