Amazon and other large multinational tech firms could face higher taxes if a minimum global tax proposal gains steam.
Source: Amazon
Big tech's global tax obligations could soon get bigger — and messier.
Looking to deter multinational companies from stockpiling earnings in low-tax countries to avoid paying taxes, the Group of Seven finance ministers recently agreed to support a landmark minimum tax proposal of at least 15% that would apply to large companies operating across the globe. The proposal also calls for companies to pay an additional tax in countries where the bulk of their goods and services are sold, regardless of whether they have a physical presence in the country. The G-7 is an organization comprised of the world's seven most advanced economies: the United States, the U.K., Canada, France, Germany, Italy and Japan.
Several big tech firms — including Facebook Inc., Alphabet Inc.-owned Google LLC, Microsoft Corp. and Amazon.com Inc. — were quick to signal their support for the agreement. But analysts say much work remains for the landmark global tax rate deal to become law, minimizing risks to tech giants' financial position in the near term.
Nick Clegg, Facebook's vice president of global affairs, said in a June 5 tweet that the social platform has "long called for reform of the global tax rules and we welcome the important progress made at the G7."
"We want the international tax reform process to succeed and recognize this could mean Facebook paying more tax, and in different places," Clegg added.
Facebook reported an effective tax rate of just 12.16% in 2020.
Google spokesperson José Castañeda also supported the G-7's latest efforts to update international tax rules, noting in an emailed statement that "We hope countries continue to work together to ensure a balanced and durable agreement will be finalized soon."
Alphabet's effective tax rate in 2020 was 16.25%.
Representatives from Microsoft and Amazon echoed similar sentiments, with an Amazon spokesperson calling the agreement a "welcome step forward" in bringing stability to the global tax system.
A Microsoft spokesperson added: "We support the global approach to international income tax rules that provides predictability and certainty for taxpayers and tax authorities, minimizes double taxation, and does not distort markets."
While Microsoft reported an effective tax rate of 16.51% in 2020, Amazon's was just 11.83%.
The push to adopt a standard global minimum corporate tax rate has been in the works for several years, said Elke Asen, a policy analyst with the Tax Foundation, an independent tax policy nonprofit. Asen noted that the latest proposal still requires support from the Group of 20 economies, which is made up of 19 advanced and developing countries and the European Union. It would also need an endorsement from the Organisation for Economic Co-operation and Development and the more than 100 countries that are part of a group known as the Inclusive Framework that has been negotiating the new tax rules.
Finance leaders from the G-20 are set to meet in Venice, Italy, July 9-10 to discuss the new proposal.
"It's still a very vague agreement so far," Asen said in an interview. "We only know, yes, it should be a 15% minimum rate, but there's so many details that still need to be worked out, including, and very importantly, the tax base. So, what exactly should be taxed at 15%?"
A tax base refers to the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation in a certain area or jurisdiction.
Asen also cautioned global leaders against crafting overly burdensome tax requirements that would hinder tech giants and other large multinational companies from adequately investing in their foreign operations.
For his part, Ian Williams, an economist and strategist at U.K.-based investment bank Peel Hunt, expects a minimal market impact from the proposal on large technology companies, at least for now.
"No G7 nation currently charges that low a rate and the details, including agreement from numerous smaller countries, require plenty of work," Williams wrote in a research report.
According to the Tax Foundation, the worldwide average statutory corporate income tax rate, measured across 177 jurisdictions, is 23.85%. The average among G-7 countries is 24%.
One country that stands to be impacted by a global minimum tax is Ireland, which is known for its low 12.5% corporate income tax rate. Ireland Minister for Finance Paschal Donohoe said in a tweet that "any agreement will have to meet the needs of small and large countries, developed and developing."
As of roughly 3:45 p.m. ET June 7, shares in Facebook, Alphabet and Microsoft were each trading in positive territory, while Amazon stock was trading down just under 1%, at $3,195.62.