Financial services sector should be excluded from new global tax rules

The UK is on the verge of securing an exemption for financial services from the new global rules on the taxation of multinationals, which would ensure that the biggest banks in the City of London do not pay more taxes on their profits in other countries.

Talks at the Paris-based OECD, which are due to end on Thursday, have accepted Britain’s thesis that the financial services sector should be excluded from the proposed new global tax system, according to two people briefed on the negotiations.

But British Chancellor Rishi Sunak’s victory in haggling over the details of the new corporate levies came at a cost, the people said. He had to make concessions to the US on dismantling the UK digital services tax that focuses on US tech companies.

The exclusion of financial services came in the first part of the global tax negotiations within the club of rich countries of the OECD, which seek to define where the biggest multinationals will have to pay taxes in the future.

The second part of the talks focuses on adopting a minimum global corporate tax rate of at least 15%, to prevent companies from shifting profits to low-tax jurisdictions.

In the first part of the talks, dubbed Pillar 1, the UK and France pushed for bigger companies, especially US tech groups, to pay more taxes in countries where they operate but are not necessarily located.

The US agreed to focus more on taxing multinationals based on where they operate as long as other countries pledged to remove their digital taxes, but shocked the UK by saying that First pillar tax rules should apply to all sectors, including financial services.

“It was a pure game between the United States and the United Kingdom and France,” said a person familiar with the negotiations.

The UK believed that financial services would be excluded from the new global tax rules, as regulations require banks to be capitalized separately in each jurisdiction in which they operate, so that they report profits and pay taxes in countries where they operate. they carry out their activities.

Without the exemption, the British Treasury risked seeing the city’s banks paying it less tax and more to other countries.

The person briefed on the OECD talks said the United States wanted to ensure that the United Kingdom made a more concrete commitment to abolish its digital services tax quickly than it had until present, but the timing of its elimination should be “carefully choreographed”.

The United States had initially wanted the UK, France, Italy and other countries with digital taxes to abolish them as new global tax rules were agreed, but this met with a strong opposition from London and Paris.

A Sunak ally said, “It’s a bit like handing over the keys to your car before you have the money.”

But UK officials have conceded that it would take a phased process, with countries with digital taxes taking a series of steps to remove them, while the US at the same time takes steps to implement the new global tax system. .

Sunak’s ally said, “I think it’s a pretty obvious point that Americans want national taxes on digital services removed. They will be, but the whole must be considered as a whole. “

The climax of the OECD talks will come shortly after Sunak delivers the annual Mansion House address on Thursday, in which the Chancellor will present a vision to make the city the “most advanced and most advanced financial services center. most exciting “world” for decades to come “.

In a document to be published alongside the speech, he will seek to place green finance at the heart of the future of the London financial center.

He will highlight how the UK government will help steer the industry down this path, with green savings bonds and rules requiring companies to report their impact on the environment.