• Global fairness in taxation is good news for tax-paying SMEs from around the world.

• The Group of Seven (G7) agreement, which proposes a global minimum corporate tax rate and granting taxing rights based on where a multinational enterprise makes profit, is an important step toward fairer taxation.

• However, the agreement at the Organisation for Economic Co-operation and Development (OECD) needs to ensure that the removal of national digital taxes will not let tech giants off the hook.

What does the G7 agreement propose?

The Group of Seven (US, Japan, Canada, the UK, France, Germany and Italy) have agreed on two pillars to create a fairer global taxation system:

1) a global minimum corporate tax rate of a minimum 15%;

2) granting taxing rights to a country based on where a multinational makes profit and not based on where its headquarters are located.

The statement reads: “We also commit to a global minimum tax of at least 15% on a country-by-country basis.” On the topic of the profit base, it says: “We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises.”

According to the G7 communication, these agreements also aim to replace similar initiatives in the tax area aimed at tech giants like the digital levies (digital tax) introduced in several European countries. The G7 agreement foresees “appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes”.

Why do we need new rules on taxation?

The current rules were designed over 100 years ago. The digital transformation has rendered many of the traditional “anchoring points” for taxation rights, like stores and factories, less relevant. Today, much of the value and transactions of the economy are happening on our screens and in big data centres which require little to no presence on markets all over the world. Multinationals now have the freedom to choose where they want to be taxed, which has led to competition between countries to offer favourable tax environments.

SMEs, on the other hand, lack the possibilities (or interest) for such tax “optimisations” and thus have a disadvantage towards their larger competitors. While a digital SME in Germany would pay around 30 % in taxes, large multinationals like Amazon or Facebook are only paying around 11.8 % and 12.2 %, respectively.

What do we think about the agreement?

While DIGITAL SME welcomes the agreement, it calls on European policymakers to ensure that large tech giants will not be given a free pass to act irresponsibly. Some individual EU member states have introduced national digital taxes or levies to address some of the taxation gaps. Differing tax rules within the EU make it more difficult for digital SMEs to navigate the European digital single market, which is why DIGITAL SME strongly welcomes an agreement at the international level. However, the compromise found at the G7 level should not let large tech giants off the hook too easily.

In addition, the G7 communication is vague and proposes a 10% profit threshold, which, taking into account the fact that taxation is carried out on group level could mean that some large enterprises can continue its practices.  Large tech companies can have a low profit margin on group level as they are increasingly taking the shapes of conglomerates and consists of very different divisions/subsidiaries with varying profit margins. These details need to be clarified in subsequent meetings to ensure that tech giants pay a fairer share of taxes.

It is crucial that the small steps taken towards a more level playing field for Europe’s digital SMEs do not end up in another myriad of new loopholes that big tech can use in their favour.

What will be the next steps?

The following timeline showcases upcoming meetings regarding global or digital taxation:

The agreement between the G7 is likely to form the basis for discussion at the bigger G20/OECD meeting later this summer. It is still unclear what this means for the discussion in the EU and how this impacts the Commission’s agenda for business taxation in the 21st century that was released recently.

As the largest network of  ICT small and medium enterprises in Europe, DIGITAL SME will continue to work for European legislation that bridges the gaps between multinational enterprises and SMEs in taxation. DIGITAL SME will also encourage the EU and member states to minimise any extra administrative burden on SMEs and make sure that the proposed legislation does not impede the growth and competitiveness of the digital sector.

You can read more about digital taxation in Digital Tax position paper here.