G20 Officially Backs Global Tax Reform

Explaining global tax reform

We all pay our fair share of taxes, so why should large multinational companies be treated any differently? The G20 is backing a proposal that would see major global tax reform over the next two years. The changes are aimed at large multinational companies who manage to evade taxation through existing tax loopholes. Large global companies like Apple and Google have been in the news a lot lately for the lack of tax paid worldwide. The G20 is calling the tax reform long overdue and a major breakthrough. Let’s take a look at the prosed taxation changes, as well as the pros and cons it could have on the Canadian economy.

G20 Economies Struggling

Governments worldwide are struggling with anemic sub-three per cent economic growth for the foreseeable future. With shrinking government revenue due to a weak job market, governments are looking at ways to increase taxes paid. For example, the federal government in Canada announced the snitch line for tax cheats in their most recent federal budget, targeted at the underground economy. Instead of targeting individual taxpayers though, the G20 is looking to take on the world’s largest companies who regularly avoid paying their fair share of tax.

“We clearly have reached the point where the governments don’t care any more about taboos, and they just say we cannot be bound by pure contractual arrangements. It’s not possible to only allocate the profit through only contractual arrangements,” says Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy in the Financial Post.

Proposed Tax Changes

The G20 is looking to close loopholes used by large companies such as Amazon and Facebook to avoid paying billions of dollars each year in taxes. In today’s global economy, it’s harder than ever to track income earned worldwide. In our current tax system, companies are permitted to perform inter-company contracts to tax havens, such as Switzerland, Ireland and the Netherlands, to avoid paying tax. The proposed rules look to put a greater focus on companies paying taxes based on where the income is actually earned.

“It is a major breakthrough and is at the heart of the social contract,” says France’s Finance Minister Pierre Moscovicid in a news conference. “People and companies have to pay the taxes that are due, it’s the only way to operate in a fair and competitive society,” added British finance minister George Osborne.

The Impact On Big Businesses

Companies like Apple, which was recently forced in front of congress on accusations of tax evasion, claim they are doing nothing wrong. These large companies say they are simply following tax laws as they exist today and have a duty to shareholders to structure their profits in the most tax-efficient manner. The unemployed citizens of countries like Greece that are up to their ears in debt see it differently though, as protests have taken place worldwide.

The proposed tax reform looks to close a number of tax loopholes used by global companies.  These tax loopholes include companies not creating tax residences in countries where they have set up major operations to avoid paying higher taxes and designating business units in tax havens such as Switzerland as holders of patents and brands that be licensed for beefed up fees to reduce taxes paid in home countries.

 Pros and Cons of Tax Reform

It should come as no surprise the world’s largest companies aren’t supporting the proposed tax changes. Business lobby groups such as the United States Council for International Business (USCIB) and the Confederation of British Industry say that if implemented, these changes could lead to job loss, as well as negatively impact trade and innovation. Companies might avoid setting up in Canada if they have to pay higher taxes, leading to fewer jobs. Smaller companies don’t see it the same way and are excited at the prospect of large companies paying their fair share of taxes, although there is some skepticism how effective the new rules will be.


Related Topics

Economic News / Taxes

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