Britain will seek to exclude the City of London’s financial services companies from a comprehensive tax reform targeting the world’s most profitable companies agreed between G7 finance ministers last weekend.
Chancellor Rishi Sunak is concerned that under a version of the plan presented by the president of the United States, which involves redistributing the profits of the world’s 100 largest companies, digital companies such as Google, Amazon and Facebook will join banks that He says he already pays a fair share of the taxes.
The impact of Joe Biden’s proposal could prove to be a significant deterrent for banks that run many of their operations from London, compounding the impact of Brexit that resulted in a financial trade shift to Amsterdam.
It is unclear whether all forms of financial services, from banks to mutual funds, insurers and hedge funds, would be excluded from a process that has yet to be negotiated.
Chris Sanger, the world government and risk tax leader at accounting firm EY, said: “Several countries assume that there would be an exception for financial services. The question now is how to handle these exceptions without all the complexities that they bring.
Sunak hailed the tax deal as “historic” when G7 finance ministers agreed on the framework on Saturday, adding that it would force “the largest multinational tech giants to pay their fair share of UK taxes.”
However, gaps in the deal remain with key details that still need to be resolved among the broader group of G20 countries, including China, India and Brazil, at meetings in Venice next month. The changes will then be negotiated among 139 countries in a process overseen by the Organization for Economic Cooperation and Development (OECD), with the goal of reaching a final agreement in October.
At the center of the changes agreed so far are two pillars: one that allows countries to tax the profits of large companies based on their sales in that market, and a second that establishes a minimum global corporate tax rate. The global minimum would be at least 15% and it would attract thousands of companies and they would be paid in their countries of origin.
A source close to the G7 talks said the UK and some EU countries were pushing for financial services to be excluded from pillar one, believing the US would agree in exchange for European support on pillar two. “The Europeans do not want to involve too many companies in this, they are mostly interested in American technology,” added the source.
A plan released in October by the OECD, the organization leading the negotiations, included a separation for banks, insurance companies and investment funds, as well as extractive industries, including mining and oil and gas companies, from the first pillar. It included plans to target digital businesses and consumer-oriented businesses.
According to the document, the financial services industry is generally required to have “appropriately capitalized entities” in each market jurisdiction, meaning that its profits are generally already taxed in each respective market.
However, Washington unveiled plans in April that removed these exemptions, with the goal of preventing them from targeting big tech companies, which rely primarily on its shores. They are the exclusions for financial services and extractive companies that the UK and EU finance ministers were trying to reinstate.
Several banks operating in London conduct their business primarily abroad. HSBC, the UK’s largest bank by revenue, generates more than half of its revenue in China, while Standard Chartered operates primarily in Asia and Africa.
Most of the London-based banks are foreign-owned and some of the larger US firms may also be captured by the new tax.
A spokesperson for UK Finance, which represents the industry, said: “We believe that the tax system should seek to ensure that the UK remains an attractive place to do business, is globally competitive and enables the UK’s banking and financial sector Kingdom support economic recovery. “
Washington is pushing in negotiations for countries, including the UK, to remove taxes on digital services they introduced as a temporary measure until a comprehensive tax review can be agreed. Research by the campaign group TaxWatch suggests that the UK would lose at least £ 230 million by abolishing the provisional tax and replacing it with pillar one.
However, the Treasury will get much more than a global minimum tax. The Public Policy Research Institute think tank estimates around £ 7bn a year in additional taxes from the 15% minimum tax rate, which far exceeds pillar one.
A Treasury spokesman said the plans would be discussed in more detail at the G20 meeting in July.
“The historic global tax agreement endorsed by the G7 finance ministers reforms the global tax system to adapt it to the global digital age, achieving a level playing field for all types of companies. The agreement ensures that the system is fair, so that the right companies pay the right taxes in the right places, “he added.
George is Digismak’s reported cum editor with 13 years of experience in Journalism