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G7 global tech tax deal: Why Amazon may still end up paying less tax

Concerns have been raised that Amazon may still not pay enough tax despite G7's global taxation scheme for top tech companies. Photo: Budrul Chukrut/SOPA Images/LightRocket via Getty Images
Concerns have been raised that Amazon may still not pay enough tax despite G7's global taxation scheme for top tech companies. Photo: Budrul Chukrut/SOPA Images/LightRocket via Getty Images

Finance ministers in London from the G7 group of advanced economies agreed over the weekend to impose a minimum global corporate tax of 15%, however, concerns have been raised that Amazon (AMZN) could be ruled out of the equation.

The landmark deal aims to make some of the world’s largest multinational technology companies, such as Apple (AAPL), Google (GOOG) and Facebook (FB) pay more tax.

On Saturday, representatives from the G7 group, including from the UK, the US and EU, said companies will pay a percentage of their profits in markets where they make large sales, no matter how small their corporate presence in that country.

How does the deal work?

The historic deal now means that companies will have to pay corporate taxes on profits where they operate, known as “pillar one” of the agreement, and will be unable to shift them to tax havens as they have done previously.

This applies to global firms with at least a 10% profit margin, however, according to the G7 communiqué, 20% of any profit above that would be reallocated and taxed in the countries where they operate.

The second "pillar" of the agreement will see a global minimum corporate tax rate of 15% to avoid countries undercutting each other.

Governments have been under an increasing amount of public pressure to clamp down on the tax avoidance strategies over the last few years.

UK chancellor Rishi Sunak, who hosted the summit, said the agreement would make the global tax system "fit for the global digital age".

Watch: G7 agrees to tax big firms and squeeze havens

Why could Amazon be ruled out?

Experts have warned that the move could mean that Amazon could be let off the hook in some of its biggest markets as the deal only applies to profit exceeding a 10% margin for the largest multinational companies.

The tech giant, which has a market value of $1.62tn (£1.15tn) and made sales of $386bn in 2020, only had a profit margin of 6.3% last year. This was thanks to its large market share and low profit margins online.

Last year, Amazon’s Luxembourg subsidiary paid zero corporation tax on sales income from across Europe of €44bn (£37bn, $53bn).

“Based on the communique, Amazon is not captured,” Paul Monaghan, chief executive of the Fair Tax Foundation, said. “If there’s another layer of detail that suggests Amazon will be captured, that's great, but it hasn’t emerged yet.”

Read more: Amazon to create 10,000 new jobs in Britain

Meanwhile, Alex Cobham, chief executive of Tax Justice Network, told the Guardian: “If the OECD cannot ensure Amazon is in scope, not only will it fail to meet the public demand for fairness here, it will also offer a blueprint for other major multinationals to escape this element of the reform.”

What might this mean for the future?

US Treasury Secretary Janet Yellen told reporters over the weekend that the "historic" agreement on a global minimum tax would "end the race to the bottom in corporate taxation and ensure fairness for the middle class and working people in the US around the world".

The deal will mean that governments will receive billions of dollars to pay off debts incurred during the coronavirus pandemic. It will also put pressure on other countries to follow suit.

Next month the larger G20 group, which includes China, Russia and Brazil, will be meeting in Venice and are expected to ratify the G7 deal, followed by the Organisation for Economic Co-operation and Development (OECD).

It is expected that 135 countries that have signed up to the OECD scheme will benefit from extra tax revenues from large corporations.

Read more: OECD sounds alarm on EU's slow vaccine rollout as UK outlook improves

Paolo Gentiloni, the EU commissioner for the economy, said Saturday's agreement was a "big step... towards an unprecedented global agreement on tax reform". He promised the EU would "contribute actively to making that happen".

But Irish finance minister Paschal Donohoe tweeted any agreement would have to "meet the needs of small and large countries, developed and developing".

Ireland currently offers a low 12.5% corporate tax rate, and is the only economy in Europe that the deal will affect, with rates at current levels.

Michael Hewson, chief markets analyst at CMC Markets, said: “Obstacles to an agreement remain high with the finer details needing to be agreed by the G20 next month, as well as the OECD, which means while this weekend’s statement can be described as a starting point for some form of framework, we know from experience, it could be years before any sort of deal starts to take shape, let alone get implemented by way of legislation.

He added: “We only have to look at the failure of the Doha Round to know how difficult these sorts of talks can be, and if trade is difficult then tax is hardly likely to be less so.

With the likes of a number of European countries determined to ensure US tech companies pay more tax in the regions they conduct their business, and reluctant to drop their own plans for digital taxes, the reality is the US administration will need to get buy in from Congress on any new tax format, and that is by no means certain, which means a clash is likely to come sooner rather than later, with the US opposed to the principal of a digital services tax on its major tech giants.”

Watch: US Secretary of Treasury - Global 15% tax rate is 'fair'