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What now for the G7 tax deal on multinationals?

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The G7’s weekend agreement on a global minimum corporate tax rate and arrangements for taxing multinationals paves the way for a broader deal in the coming weeks that could reshape cross-border taxation for years to come.

Hailed as historic by its backers, the deal nonetheless contains much detail that still needs to be hammered out in time for countries of the wider G20 grouping to give it their support at a meeting scheduled for next month.

Here is what we know so far and what remains unclear:

WILL THE G7 DEAL APPLY WORLDWIDE?

The G7 deal for a global minimum corporate tax of at least 15% sets the stage for the next step, which is a June 30-July 1 online meeting of the 139 countries negotiating future rules for cross-border taxation at the Organisation for Economic Cooperation and Development (OECD) in Paris.

The countries aim to reach a consensus at the meeting on the details, as much technical work has already been done. Any accord from that meeting will then go before G20 finance ministers for endorsement when they meet in Venice on July 9-10.

The OECD and the United States have said a final sign-off might not be possible until a subsequent G20 meeting in October, because the U.S. position may not be firm by July as a domestic tax package will be going through Congress.

A G20 sign-off would mean the world’s largest economies will implement it, so its reach would effectively be worldwide.

IS THIS THE END OF TAX HAVENS?

If the deal does not kill off tax havens entirely, it will make them far less attractive for many firms looking to cut their tax bill but also burnish their credentials with investors focusing on environmental, social and corporate governance.

The whole idea of the global minimum tax is that it gives countries the right to add a top-up tax on company profits in countries with tax rates lower than the global minimum.

Moreover, the G7 wants the minimum rate to be applied on a country-by-country basis rather than an average across the countries a company operates in – an approach considered far tougher on tax havens.

So if a U.S. company books profit in the British Virgin Islands, where there is no corporate tax, U.S. tax authorities could apply a 15% tax on those profits – if that’s the global minimum figure finally agreed on.

HOW WILL THIS APPLY TO MULTINATIONALS?

A separate part of the international tax talks deals with how to divvy up governments’ rights to tax excess, or non-routine, profit of the biggest multinationals, among them major digital companies such as Apple and Google.

The G7 agreed that governments should get the right to tax at least 20% of the profit earned in their country by a multinational over a 10% margin. All indications are that the excess profit would also be subject to the global minimum.

That said, a lot of the metrics still need to be worked out and there is still scope for such companies to make their point of view heard within the debate.

WHAT ARE THE POSSIBLE LOOPHOLES?

Countries negotiating the global tax are likely to exempt some sectors. For example, extractive industries are likely to be carved out as companies usually pay royalties upfront to the government where the mines or oilfields are located. There has also been talk of carve-outs for certain financial services.

Officials say some nations want wiggle room on tax breaks for research and development. Others, such as China, want to protect low-tax economic zones they use to attract investment.

WILL THIS MEAN BIG GOVERNMENT WINDFALLS?

The OECD calculated in October that a global minimum tax could yield $100 billion a year, or 4% of global corporate income tax. That’s probably on the low side as it was based on a 12.5% rate, which was the focus of talks at the time.

As big as the headline figure sounds, however, it’s a drop in the ocean compared with the trillions of dollars that governments around the world have spent to keep their economies afloat during the COVID-19 pandemic.

WHAT ABOUT THE NETHERLANDS, LUXEMBOURG AND SWITZERLAND?

Such countries with tax advantages have seen the writing on the wall in recent years and have been closing tax loopholes, while trying to compete for foreign capital on terms other than just low taxes.

Ireland, where many U.S. tech companies have big operations, has said it will keep its 12.5% corporate tax rate regardless of what gets decided internationally.

Finance Minister Paschal Donohoe estimates that Ireland’s annual corporate tax take will be about 20% or 2 billion euros lower than it otherwise would have been by 2025 due to the anticipated changes but does not expect a massive outflow of companies from its shores.

Switzerland, which is under pressure from abroad, has promised to eliminate special low tax rates that benefited about 24,000 foreign companies based there.

“Switzerland will take the necessary measures to continue to be a highly attractive business location,” the finance ministry said in a statement.

Thanks to its intricate net of tax treaties with other countries, the Netherlands can expect to remain a conduit for multinationals to pass profits from one subsidiary to another at favourable rates.

While the corporate tax rate in the Netherlands is 25%, the Dutch began this year taxing outbound royalty and interest payments to places where the corporate tax rate is below 9%, and plans to do the same for outgoing dividends from 2024.

However, it is not clear when the G7 agreement will go into effect and the Dutch rules could still change before 2024.

 

(Additional reporting by Toby Sterling in Amsterdam, Padraic Halpin in Dublin and Silke Koltrowitz in Zurich; Editing by Mark John and David Clarke)

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Toronto Stock Exchange hits record high on energy boost

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Toronto Stock Exchange

Energy shares pushed Toronto Stock Exchange index to a record high on Tuesday, as investors eyed the U.S. Federal Reserve’s meeting this week for cues on the tapering of its monetary policy.

* The energy sector climbed 1% tracking crude prices, which were buoyed by expectations that demand will recover rapidly in the second half of 2021. [O/R]

* The Fed kicks off its two-day meeting on Tuesday, and officials are faced with ongoing tension between their two main goals, as inflation rises faster than expected even with millions of Americans still unemployed.

* At 9:38 a.m. ET (1338 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was up 77.55 points, or 0.38%, at 20,235.2, an all-time high.

* Producer prices in Canada most likely rose 3.1% in May from April, pushed higher mainly by softwood lumber, Statistics Canada said in a preliminary flash estimate.

* The materials sector, which includes precious and base metals miners and fertilizer companies, lost 0.4%.

* On the TSX, 163 issues were higher, while 61 issues declined for a 2.67-to-1 ratio favoring gainers, with 17.47 million shares traded.

* The largest percentage gainer on the TSX was BRP Inc, which jumped 4.6%, after the insurance distribution company issued a $350 million worth substantial issuer bid.

* Its gains were followed by Aritzia Inc, which rose 4.5%, after the apparel retailer acquired 75% of the athletic apparel maker Reigning Champ in deal worth $63 million

* Miners First Quantum Minerals Ltd and Hudbay Minerals Inc, fell the most on the TSX, down 4.1% and 3%, respectively.

* The most heavily traded shares by volume were Canadian Natural Resources Limited, BCE Inc and Auxly Cannabis Group Inc.

* The TSX posted 18 new 52-week highs and no new low.

* Across all Canadian issues there were 102 new 52-week highs and five new lows, with total volume of 32.21 million shares.

 

(Reporting by Amal S in Bengaluru; Editing by Amy Caren Daniel)

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Canadian dollar hits 7-week low

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Canadian dollar

The Canadian dollar weakened against its U.S. counterpart on Tuesday as investors weighed prospects of the Federal Reserve turning less dovish, with the commodity-linked currency extending its pullback from a recent six-year high.

The loonie was trading 0.4% lower at 1.2192 to the greenback, or 82.02 U.S. cents, after earlier touching its weakest level since May 6 at 1.2204. Earlier this month, it touched its strongest in six years at 1.2007.

“We’ve had such a strong move with commodity currencies and that trade has been slowly getting unwound,” said Edward Moya, a senior market analyst at OANDA in New York.

“We are starting to see a little bit more of an expectation that you are going to have a slightly less dovish Fed tomorrow and the commodity trade could continue to get undone a little bit,” Moya added.

In a new policy statement and economic projections due on Wednesday, the Fed is expected to acknowledge the first conversations among its policymakers about when and how fast to pare back the massive bond-buying program launched last year.

The program has supported global economic recovery, boosting commodity prices. Canada is a major producer of commodities, including copper and oil.

Copper fell 4%, extending its pullback from a record high in May. Oil settled 1.8% higher at $72.12 a barrel.

Canadian housing data for May was mixed. Housing starts climbed 3.2% compared with the previous month, while home sales were down for a second month after a blazing start to the year.

Canadian consumer price data is due on Wednesday, which could offer clues on the Bank of Canada policy outlook.

The Canadian 10-year yield was little changed at 1.389%. On Monday, it touched its lowest intraday level in more than three months at 1.365%.

 

(Reporting by Fergal Smith; Editing by Jonathan Oatis and Peter Cooney)

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G7 nations to boost climate finance

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G7 leaders agreed on Sunday to raise their contributions to meet an overdue spending pledge of $100 billion a year by rich countries to help poorer countries cut carbon emissions and cope with global warming, but only two nations offered firm promises of more cash.

Alongside plans billed as helping speed infrastructure funding in developing countries and a shift to renewable and sustainable technology, the world’s seven largest advanced economies again pledged to meet the climate finance target.

But climate groups said the promise made in the summit’s final communique lacked detail and the developed nations should be more ambitious in their financial commitments.

In the communique, the seven nations – the United States, Britain, Canada, France, Germany, Italy and Japan – reaffirmed their commitment to “jointly mobilise $100 billion per year from public and private sources, through to 2025”.

“Towards this end, we commit to each increase and improve our overall international public climate finance contributions for this period and call on other developed countries to join and enhance their contributions to this effort.”

After the summit concluded, Canada said it would double its climate finance pledge to C$5.3 billion ($4.4 billion) over the next five years and Germany would increase its by 2 billion to 6 billion euros ($7.26 billion) a year by 2025 at the latest.

There was a clear push by leaders at the summit in southwest England to try to counter China’s increasing influence in the world, particularly among developing nations. The leaders signalled their desire to build a rival to Beijing’s multi-trillion-dollar Belt and Road initiative but the details were few and far between.

Johnson, host of the gathering in Carbis Bay, told a news conference that developed nations had to move further, faster.

“G7 countries account for 20% of global carbon emissions, and we were clear this weekend that action has to start with us,” he said as the summit concluded.

“And while it’s fantastic that every one of the G7 countries has pledged to wipe out our contributions to climate change, we need to make sure we’re achieving that as fast as we can and helping developing countries at the same time.”

PLEDGE OVERDUE

Some green groups were unimpressed with the climate pledges.

Catherine Pettengell, director at Climate Action Network, an umbrella group for advocacy organisations, said the G7 had failed to rise to the challenge of agreeing on concrete commitments on climate finance.

“We had hoped that the leaders of the world’s richest nations would come away from this week having put their money their mouth is,” she said.

Developed countries agreed at the United Nations in 2009 to together contribute $100 billion each year by 2020 in climate finance to poorer countries, many of whom are grappling with rising seas, storms and droughts made worse by climate change.

That target was not met, derailed in part by the coronavirus pandemic that also forced Britain to postpone the U.N. Climate Change Conference (COP26) until later this year.

The G7 also said 2021 should be a “turning point for our planet” and to accelerate efforts to cut greenhouse gas emissions and keep the 1.5 Celsius global warming threshold within reach.

European Commission President Ursula von der Leyen said the G7 leaders had agreed to phase out coal.

The communique seemed less clear, saying: “We have committed to rapidly scale-up technologies and policies that further accelerate the transition away from unabated coal capacity, consistent with our 2030 NDCs and net zero commitment.”

The also pledged to work together to tackle so-called carbon leakage – the risk that tough climate policies could cause companies to relocate to regions where they can continue to pollute cheaply.

But there were few details on how they would manage to cut emissions, with an absence of specific measures on everything from the phasing out of coal to moving to electric vehicles.

Pettengell said it was encouraging that leaders were recognising the importance of climate change but their words had to be backed up by specific action on cutting subsidies for fossil fuel development and ending investment in projects such as new oil and gas fields, as well as on climate finance.

British environmentalist David Attenborough appealed to politicians to take action.

“We know in detail what is happening to our planet, and we know many of the things we need to do during this decade,” he said in a recorded video address to the meeting.

“Tackling climate change is now as much a political and communications challenge as it is a scientific or technological one. We have the skills to address it in time, all we need is the global will to do so.”

($1 = 1.2153 Canadian dollars)

(Reporting by Elizabeth PiperAdditional reporting by William James and Kate Abnett in Brussels and Andreas Rinke in BerlinEditing by William Maclean, Raissa Kasolowsky and Frances Kerry)

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