Rishi Sunak pushes for City of London loophole in G7 tax agreement

·Senior City Correspondent, Yahoo Finance UK
·3-min read
UK chancellor Rishi Sunak. Photo: HM Treasury/Flickr
UK chancellor Rishi Sunak. Photo: HM Treasury/Flickr

UK chancellor Rishi Sunak is said to be pushing for a carve out for financial services in the "historic" new G7 corporation tax agreement struck over the weekend.

An exemption for banks would boost the City of London but reportedly faces resistance from the US.

G7 leaders agreed a deal on global tax reform over the weekend intended to make big technology companies pay tax more equitably around the world. New rules will see companies with healthy profit margins in home markets pay tax on those profits across all the countries where they operate, not just their domiciled market. Taxes will kick in above a certain level and be levied regardless of whether local subsidiaries there are loss-making. The reforms are intended to stop the practice of tech companies shifting sales and profits into low tax jurisdictions. 

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Sunak, who chaired the G7 talks, called the agreement "truly historic" and the reforms "seismic". However, the Financial Times reported on Wednesday that the chancellor was now pushing for a carve out in the deal that would exempt financial services.

The chancellor is leading a group of European leaders calling for an exemption for banks. Unlike tech companies, banks already face large amounts of regulation and are forced to properly capitalise their subsidiaries around the world. It means a bank already faces high tax burdens in each market it operates in.

The OECD acknowledged this reality when it set out principles for global tax reform last year. In a paper in October, the group said banks "will generally be taxed in that market location with the result that there is no further need for any … re-allocation". 

The G7 agreement is seen as a key stepping stone towards a more wide-ranging OECD agreement, which would also include the likes of China and India. The final G7 reforms are likely to serve as the blueprint for OECD talks.

Any carve out would be a boost for the City of London. As they stand, the new rules would hit UK-domiciled global banks such as HSBC (HSBA.L) and Standard Chartered (STAN.L), which both conduct large amounts of business in Asia.

The carve out plans are said to face resistance from the US. The FT reported that the Biden administration broadened the scope of the tax plans ahead of the agreement. The issue is likely to be on the table in G7 talks in the coming days as US President Joe Biden visits Britain for the first time since taking office to take part in the summit.

A spokesperson for the UK Treasury declined to comment on reports that Sunak was pushing for the financial services carve out.

"The historic global tax agreement backed by G7 finance ministers reforms the global tax system to make it fit for the global digital age, achieving a level playing field for all types of companies," the spokesperson said. "The deal makes sure that the system is fair, so that the right companies pay the right tax in the right places.

“The agreement will now be discussed in further detail at the G20 Financial Ministers & Central Bank Governors meeting in July."

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