Private Notice Question
My Lords, the reforms agreed by the G7 countries include a global minimum tax of at least 15% and changes to profit allocation rules that mean large digital companies will pay more tax in countries where their customers are located, including the UK. The detailed design of the new rules is still under consideration, so it would be premature to provide revenue estimates. When the rules are implemented, the revenue impact will be formally assessed and certified by the OBR.
I congratulate the Chancellor and the Government on reaching this landmark agreement. It is a positive step towards a global level playing field and an end to the unjust practice of offshoring. While this is a welcome starting point, does the Minister agree with the Chancellor’s assessment that this is a fair deal, given that the proposal now outlined clearly favours high-income countries at the expense of lower-income ones? Would it not be fairer for the Government to pursue a path on which additional tax revenues are distributed without preference being given to the countries in which multinationals are headquartered?
I thank the right reverend Prelate for his words of welcome. This is indeed a significant agreement. I disagree with his assessment of what has been agreed so far. It will benefit all countries, including lower-income countries. As he will know, this is not the end of the process. A key part of this process so far and going forward is the OECD inclusive framework, which means that less economically developed countries have an equal voice in the final agreement to those that are more economically developed.
My Lords, the global tax agreement is to be welcomed, despite inevitably leaving some unanswered questions. As we know, the agreement was struck among the G7—generally the most sophisticated and prosperous of Governments, with more developed tax systems. The tax avoidance industry has yet to be put loose on the detailed proposals to see how resilient they are. Concerns have already been expressed about a loophole being identified, with minimum tax applying only to profits exceeding a margin, and different business models—
My Lords, as I just said to the right reverend Prelate, the UK robustly supports the BEPS initiative being taken forward by the OECD’s inclusive framework group, which includes more than 100 jurisdictions and ensures that less economically developed countries have an equal say in developing international solutions. I assure the noble Lord that the UK Government also put resources into developing countries to help them to build the tax resources they need, so that they can ensure the effective enforcement of rules and collection of taxation.
My Lords, a lot of the attention has been on the minimum tax rate announced as part of the agreement—I hope the Government will not be tempted to go above the 15%—but more important than the rate is what will be taxed. Does the Minister agree that the UK must not allow global rules to override our freedoms to incentivise investment through things such as freeports and super-deductions?
I reassure my noble friend that the UK Government’s freeports will not be affected by this announcement. Freeports are not about corporation tax directly but are designed to support a wide range of businesses with a wide range of tax offers focused on local regeneration, such as full relief from SDLT, enhanced capital and building allowances, business rates relief and NICs relief.
My Lords, does the Minister agree that the US has used its might and played a blinder? Countries such as the UK will of course see increases in tax revenues under the new global corporate tax schemes, but the overwhelming winner is the US Treasury. Could a better system to benefit the UK—and indeed many other countries, including developing countries—have been devised?
My Lords, I am afraid I again disagree. The agreement we have reached, although only at a G7 level, is hugely significant and represents progress on work that started five years ago on this initiative but a lot longer ago under other initiatives. A key part of that work for the UK has been the inclusion of both pillars of this agreement. That is something the US had not always signed up to and is a key shift in its position from previous negotiations.
The initiative of President Biden, supported by the G7, is very warmly to be welcomed, but a number of potential loopholes have already been exposed—for example, that this tax would not apply to profits below 10%, when it is perfectly possible for companies to manipulate their figures so that in particular countries their profits are below 10%. Are the Government committed to closing off all those loopholes, so that these big corporations really do pay their fair share of the tax?
My Lords, I emphasise again that the G7 agreement was a really important milestone in progressing this international work on tax. It is only the first step towards that agreement, and there is much more detail to be worked on. The next step will take place at the G20 next month, when more details will be discussed with a wider range of countries.
I will pick up on the point made by the noble and right reverend Lord, Lord Harries. While we all welcome the progress made, does my noble friend not agree that companies, such as Amazon in particular, will generate less than a 10% margin, mainly due to their monopolistic position, therefore avoiding the tax? Would it therefore not be sensible to retain the digital services tax and beef it up so that the tax cannot be passed on to suppliers, as is currently the case, and more importantly so that profits made on goods sold outside the marketplace are also fairly taxed?
My Lords, I cannot comment on individual companies. As part of the further work we are doing, we are considering how pillar 1 will apply to groups that have different activities and business lines, some of which may meet the scoping criteria and some of which may not. Pillar 1 is designed to respond to concerns around international tax rules not adequately dealing with digital businesses generating profits in countries where they do not have physical presences. Online sales businesses are not necessarily within that. We recognise the concerns about tax treatment of online retailers; that is why we are doing other work across the tax system, such as the fundamental review of business rates. In the call for evidence we asked about the scope and potential impacts of an online sales tax, for example.
My Lords, that is also subject to ongoing negotiations, including at the G20 next month. I assure the noble Lord that the digital services tax is intended to stay in place until we have implemented the new international agreement, not just agreed it in principle, so those revenues will continue to flow.
My Lords, could my noble friend answer the question that was put previously: is it not the case that the US is the main beneficiary in tax revenues from this? Could she deal with the point about Amazon? She says she cannot deal with particular individual taxpayers, but the whole point of this measure is to deal with Amazon, which is destroying retail businesses across the country because they have to pay rates. On the digital service tax, could she confirm that Amazon reacted to it by simply passing on the 2% to its third-party retailers, and that there was no disadvantage to it at all? As my noble friend Lord Leigh has pointed out, Amazon would not be covered by this measure. How can you enter into a deal without knowing the detail in advance?
My Lords, as I have said, a lot of the detail is still being worked out. However, I reassure my noble friend on a number of fronts. As part of the work on the detail of the agreement, we are considering how pillar 1 will apply to groups that might have different business lines, some of which may fall within the criteria and others outside them. I would say to both my noble friends, as indeed I did, that the agreement is designed to address specific concerns about digital companies, or companies that do not have physical presences in the countries where they have activities. We are doing other work to address concerns around online retailers; for example, I mentioned the fundamental review of business rates that the Government are currently undertaking.
My Lords, as the Minister has said, these are very early days. From the information that she has given us today in reply to very specific questions, we are not sure whether we have a framework that is good, bad or indifferent. It is a bit like the curate’s egg: it is good in parts. Could she give us some idea of when the discussions will be sufficiently refined so that Chancellors of the Exchequer in national countries can begin to consider the income stream that they have to assist with their own domestic problems of fixing a budget?
My Lords, perhaps I can clear up some ambiguity. The Government view the agreement that we have reached this week as completely good and in the interests not just of developed countries but of developing countries. It is a significant agreement. It is the first time that there has been G7 alignment on the core parameters of a two-pillar solution to this issue. It sets out the scope and effect of pillar 1, a minimum rate of corporation tax across the world and the application of that minimum rate on a country-by-country basis. So there is a level of detail but there is more work to do. As I have said, the next stage of that work is in July at the meeting of the G20.
My noble friend has rightly said that the next stage is that G20 meeting. What assessment have Ministers made, and what assessment was made at the discussions last weekend, of the likelihood of countries outside the G7 agreeing to these plans without some changes having to be made?
My Lords, we recognise that this represents the basis of a potential agreement and compromise between different countries, but obviously it is important that those countries have their say and their voice in the process. The fact that this is the first time the G7 have been aligned behind a set of parameters provides important momentum but there is more work to do.
My Lords, I assume the Government did some economic modelling before entering into this agreement and making a written promise to abandon the digital sales tax upon the implementation of pillar 1. If so, when will the Government publish the details of their modelling so far so that we can examine their policy in detail?
My Lords, the digital sales tax was always intended to be a transitional approach. The UK Government’s preferred solution has always been an international agreement. We are only part of the way through negotiating that but the agreement reached at the weekend represents important progress.
My Lords, I can reassure a number of noble Lords that the noble Lord is correct that we will be removing the digital services tax only once we have full agreement and a plan for the implementation of a new international system. That is the position of the UK and it is supported by several other countries in the negotiations, such as France and Canada.
My Lords, all supplementary questions have been asked.