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G7 deal: UK is badly conflicted between offshore tax havens and Biden’s global tax drive

US and UK finance ministers Janet Yellen and Rishi Sunak at G7 meeting in London.
US and UK finance ministers Janet Yellen and Rishi Sunak at G7 meeting in London. EPA

For four decades, there has been a global race to the bottom on multinational tax, with Britain and its network of tax havens at the heart of it. Multinationals have seen tax as a cost rather than paying states their due share of revenues to provide public services like transport, energy, laws and education, without which businesses could not operate with any degree of efficiency and reliability. But in today’s era of climate change and social responsibility, paying fair taxes is widely seen as a primary duty of corporations, not an expense or a choice.

With Britain playing host to the G7 as its current president, the nation is deeply conflicted. On the one hand it wants to be best friends to multinationals and presides over its network of tax-friendly overseas territories like the British Virgin Islands, Cayman Islands and Bermuda. These havens actively invite multinationals to operate there with zero or minimal taxes, and state-guaranteed financial secrecy - forcing other countries to offer very low tax rates to attract international business.

But at the same time, Britain has had to show robust tax leadership to prevent tax avoidance as current president of the G7 group of nations. At the G7 finance ministers meeting in London ahead of the G7 summit in Cornwall on June 11 to 13, member states agreed in principle a global minimum corporation tax rate of 15% for all corporations so that they no longer play one country against another in an attempt to minimise their taxes.

View of coastline and sea on British Virgin Islands
The British Virgin Islands: a world leader in tax avoidance. Alex Lee/Unsplash, CC BY-SA

G7 members are angry at multinational tax avoidance, especially in relation to the big tech companies like Google, Facebook and Amazon, whose profits have grown exponentially in the pandemic while their tax payments remain negligible. The US leadership on a minimum global rate for corporation tax – and also new rules that would tax the world’s biggest 100 companies based on where they generate revenues rather than where they are based for tax purposes – is a huge opportunity to stop multinationals from playing countries off against one another. So where does this leave the UK?

The UK and tax avoidance

The argument for a single global minimum corporation tax rate is very appealing – it creates a level playing field where companies cannot argue that others are getting away with non-compliance. Unfortunately the legal and technical complexity of global company structures of multinationals will make it very difficult in practice even for regulators to see where revenues are being earned, what taxes are being paid, and how much tax avoidance is taking place. For a long time multinationals refused to reveal their revenues and taxes paid in different jurisdictions, and such information is still sparse.

Similarly, accounting is far from an exact science, and the numbers and policies can always be adjusted to suit management bias and tax minimisation. Consolidated group accounts can also be hopelessly misleading in terms of aggregate profits earned on which to set a minimum tax rate.

Global accounting and law firms have made significant profits from advising their corporate clients on tax avoidance, with the UK having one of the largest accounting professions in the world. With the expertise of these advisers, companies set up subsidiaries in these offshore jurisdictions that only really exist on paper, and transfer revenues and royalties through them to take advantage of their tax laws. In this way, the UK acts as a centre for facilitating this system.

Given the significant potential impact of these new regulations on multinationals, the lobbying is already underway – not least from UK interests. The original US proposal was for a global minimum rate of 21%, and has already been reduced to “at least 15%”. On the other hand, the Americans are trying to ward off proposals by countries including the UK, Spain, Italy and India for a separate tax on digital companies. Washington is threatening US$2 billion (£1.4 billion) of tariffs on these countries, pending the outcome of the G7 summit.

Shot of Amazon lorries outside an Amazon warehouse
The US is trying to protect the likes of Amazon against a digital tax. Mike Mareen

But if the US is therefore hardly a benevolent neutral in this debate, its leadership on corporation tax is definitely welcome. For a long time, the US was a laggard on international taxation and also acted as a tax haven through Delaware on the east coast, where many companies are located because it helps them to minimise their tax requirements. Former president Donald Trump was openly hostile and partisan on this theme.

It is also worth noting the potential benefits to developing countries from the proposals. Whilst data on actual tax paid country-by-country by multinationals is very limited, there is inequality in terms of the share received by developing countries. Such a move could therefore potentially increase the tax take of such countries.

Their gain will be to the loss of offshore tax havens like the UK’s overseas territories. Though no one can force them to adhere to the US proposals, the UK is likely to come under international pressure to bring its satellites onboard. The whole climate has now changed to the point that it is possible to envisage these territories participating in a global minimum rate and also being less secretive than in the past.

Their consolation will be that they serve not only corporations but wealthy individuals too, and these proposals will not be targeting them. In that sense at least, the offshore tax havens may well just carry on in the same way as before.

For now, however, the big question is how the politics around international tax will play out at the G7. We should not hold our hopes too high. The hypocrisy and evasion is very deep – as an example, most of the trendy new global ESG (environmental, social and corporate governance) investment funds are headquartered in the tax haven of Luxembourg.

The powerful do not want to pay taxes. As to whether this will change, we’ll have to judge them on their actions and not their words in the months to come.

This article has been amended to reflect the agreement of the proposed deal on a minimum global tax rate.

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