G7 Agreement Covers A Lot Of Ground, But We Have Miles To Go
Updated: Jul 26
The taxation issue worrying American tech giants saw many developments in the first week of June.
The U.S., which considers digital services tax (DST) levied by countries on Amazon, Google, Facebook, and others as discriminatory, declared retaliatory tariffs on $2 billion worth of imports from six nations. The move was suspended in the wake of impending negotiations in the Group of Seven (G7) meet. Three days later, the powerful grouping announced an agreement under which tech companies will pay a minimum 15 per cent tax in the countries they earn revenue.
Like central banks’ interest rates stance and governments’ stimuluses, taxes on tech behemoths also shape the U.S. and the global economy. And there are compelling arguments in this regard.
Governments Eye New Revenue Sources
In its latest report, the Organisation for Economic Co-operation and Development (OECD) has said the global economy would grow by 5.8 per cent in 2021.
The forecast relies heavily on government stimulus. Countries, including the U.S. and Canada, have breached acceptable debt-to-GDP ratio with record-high fiscal deficits to pump money into their ailing economies. Subsidies and cash support are aimed at increasing demand in the economy. Some benefits have accrued and the U.S. economy grew at 6.4 per cent on an annualized basis in the first quarter. The stimulus plan added three to four percentage points to this record growth.
The only major economy that contracted in the first quarter was the UK, one of the six countries on which the U.S. had announced tariffs. The UK economy shrunk 1.5 per cent in the first quarter of 2021, with both production output and services registering contraction.
The G7 meet had both the U.S .and the UK deciding the fate of tech giants. The cohort of finance ministers knew the exact shortfalls in their budgets, and how the deal can maximize revenues was a major consideration. The agreement was termed landmark, but how and when it implements remain largely unclear.
More than tax havens that might lose revenues due to a multilateral deal like this, it is the economies outside of the G7 that went into a huddle. In an interview in February 2021, the Russian finance minister had said that the country is mulling a tax on foreign tech companies. India, Spain, and Turkey are already levying tax on tech giants.
Digital Services Tax Was Never A Common Ground
Tech companies, a key stakeholder in the issue, have welcomed the G7’s international tax proposal. A global minimum corporate tax rate is likely to hurt less than separate DSTs levied by countries of operations. The U.S. Treasury Department also considers the deal will end DST or other similar measures adopted by various countries, which are imposed on revenues instead of profit. This, critics argue, translates into higher costs for consumers, albeit the government coffers make extra bucks.
The DST is a disputed issue where neither the U.S. nor the countries levying or planning to levy it is ready to concede. Global trade, already reeling from the pandemic-induced slowdown, is likely to be impacted if governments do not reach a consensus. Moreover, tariffs and other trade barriers are complicated subjects and the DST issue threatens to expose goods and services to retaliatory tariffs in the event of any delay on compromise.
The G7 agreement is the right step in this direction, but not conclusive. Countries within the G7 might still go ahead with their planned DSTs in the wake of subdued government revenues. Canada, for example, had plans to introduce the levy from 2022 and how the agreement will affect it is uncertain. Executing a pact as ambitious as this one, where countries like Russia, India, and China, too, have to be on board, is never easy.
Tech Companies, Cash Cows?
Viewing American tech giants as just a revenue source to fund expenditure is not in accordance with the principle of equity. Google and other tech behemoths have shaped the digital landscape of many economies and these giants are not the only entities that use tax havens to avoid levies. These companies promote economic growth, create new jobs, and further goals like financial inclusion and seamless trade. Moreover, a large chunk of revenues of tech giants goes into research and development so any inequitable stance of taxing revenues rather than profit can prove counterproductive. The G7 agreement covers a lot of ground. Given the shortfalls in governments’ revenues, the new international taxation is a convenient way to refill the quarters. But countries still have many miles to go.
Kunal Sawhney is CEO of the Kalkine Group.