The Treasury has hailed the new G7 agreement for a minimum level of corporate tax announced on Saturday as ‘seismic’, yet it’s not as earth-shattering as it would perhaps like to suggest.

I’m always a bit suspicious when normally staid bodies resort to extravagant language. Normally the explanation is quite prosaic, like the inexperience of the weekend duty press officer. But sometimes extravagant language is used as a smokescreen to exaggerate the importance of deals that sound important but have few meaningful consequences.

It’s the second explanation that holds true on this occasion. And mainstream retailers looking for a more level playing field against the tech giants in a week that started with the YouGov/Cebr consumer confidence level sky-high post-lockdown should not pin their hopes on this.

The agreement is only to apply a 15% minimum corporate tax rate to 20% of profits above a 10% margin on overseas earnings of multinationals. If the local rate of tax is below 15%, then the host government can charge an additional tax to top up to 15%. 

The Organisation for Economic Co-operation and Development (OECD) thinks it will raise $50bn to $60bn in taxes (not even a thousandth of world GDP).

Even that estimate looks way too high and those who came up with the estimate say that, in fact, other measures will be needed even to generate that much revenue.

“The 10% profit-margin floor would be a pipe dream for most retailers. Even Amazon’s margin is only 7.5% so it is unlikely to be affected. Very few companies will pay any extra tax”

But this will do little for the hard-pressed retailers emerging from lockdown. 

First, the 10% profit-margin floor above which the taxes are levied would be a pipe dream for most retailers. Even in the supposedly profitable tech share of the market, Amazon’s margin is only 7.5% so it is unlikely to be affected. Very few companies will pay any extra tax.

Second, in tech one of the habits that has emerged is to expense most development expenditures. So Uber, which is widely regarded as successful, in fact makes losses. The effect of this is to hold profit margins down, which will keep most below the 10% margin above which this tax applies. And it appears that most countries will now not proceed with their plans for a digital service tax.

Third, the agreement only applies to taxes on profits – and not even all profits because it actually only affects that part of profits that are not distributed (dividends are caught by personal taxes, not corporate taxes).

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‘The most prominent tax advantage used by tech giants is their low VAT rate from supplying from VAT tax havens’

Most tax paid by corporations is the combination of sales taxes or VAT, property taxes, social contributions and, of course, the income tax earned by their employees. Corporate taxes (more accurately called profits taxes) amount to a small proportion of GDP – the OECD average is 3.14%.

The most prominent tax advantage that the tech giants use in retailing is their low VAT rate from supplying from VAT tax havens. This agreement does not affect that.

Fourth, the scale of the tax is pretty low. Even someone with a profit margin of 50% with earnings in Ireland, where the corporate tax rate is 12.5%, will only pay an additional tax of 0.5% of revenue or 1% of profits. Not enough to create much corporate advantage.

Finally, the agreement leaves open the opportunity for governments that previously offered low tax regimes to offer incentives in other ways that lower the effective corporate tax rate.

So, given that the deal actually does pretty well nothing, why the overblown language?

Obviously, politicians like to be seen to be doing something and to claim credit where it is not due. And they normally like to come up with something seemingly far-reaching to justify their taxpayer-financed junkets, for which of course the Covid travel restrictions were lifted.

“There will be more agreements on tax co-operation to follow. The trade union of treasuries around the world loves nothing more than to set up a cartel to act against the multinationals that (in their view) hold them to ransom”

But there are more serious reasons for thinking that the measures agreed might have an effect eventually. It is meant to be part of a programme of fiscal coordination between countries to prevent companies playing governments off against each other.

There will be more agreements on tax co-operation to follow. The trade union of treasuries around the world loves nothing more than to set up a cartel to act against the multinationals that (in their view) hold them to ransom.

But you could argue that tax competition, with companies voting with their feet to prevent being exploited, is the only factor keeping the tax authorities honest and preventing them, with their powers of enforcement, from overtaxing the business sector.

The right role for tax competition is surely to limit the excesses, but not to prevent companies from leaving countries where the corporate tax system is too burdensome.

So time will tell how important the long-term impacts of this agreement will turn out to be as the follow-on agreements emerge. But in the near future this ‘seismic’ event will not make the earth move.