The newly proposed global tax rules will drastically influence all international companies, with crypto being a target as well.
At a meeting in London earlier this month, the finance ministers from the G7 — the United States, Japan, Britain, Germany, France, Italy and Canada — unanimously agreed to begin creating the framework for a global corporate tax rate.
The framework laid out a “two pillar” principle. The first pillar ensures that companies that make a 10% profit margin would be subject to the tax rate. The second pillar ensures that countries will charge a 15% minimum tax rate. Under all of this, the new rules will focus on where the profit was made and not where the company is based — the idea being that companies are discouraged from moving money around the globe, or providing services in one country from another that has a cheaper tax rate.
Does legal mean moral?
The concept of a global corporate tax rate is nothing new. With companies such as Google, Amazon, Facebook and Apple making billions of dollars in revenue and paying little to no tax, regulators and governing bodies have attempted to close the loopholes used by these large multinationals.
The practice of making money in one country and then moving it to another in order to pay less taxes or avoid them all together is perfectly legal, mostly. Although, in practice, it can raise some moral questions. This practice has only now truly come under the spotlight with the rise in international and digital businesses moving more funds around the globe than ever before. Apple, for example, holds more cash in reserves than the entire gross domestic product (GDP) of many nations. Yet, in most countries, it pays less tax than the average domestic company.
This closure of loopholes may signal a good move for domestic governments. The United Kingdom, for example, stands to gain an additional 14.7 billion pounds for their economy over the next ten years — a massive help, given the large impact of the global COVID-19 pandemic.
But what about cryptocurrencies?
With the inevitable introduction of these new pillars, we have to ask ourselves: How could this impact crypto companies?
Crypto, at its core, is truly international. It also moves money around the globe and targets an international audience. As a consequence, purely by its operation, it falls under what many believe will be the new rules relating to the taxation of international companies. (Note: “International companies” literally means companies that have multiple locations, or do business, in multiple countries.)
The implementation of these new rules is yet to be confirmed, and as to exactly how this will look, many are still unsure. The feeling is that crypto companies who operate internationally will have to do one of two things: Either be prepared to pay a corporate domestic rate of 15% all over the globe, or move their physical location to a truly international location. To be clear, this would have to be more than simply a registered office.
In reality, we would see the death of companies based out of locations such as the Seychelles or British Virgin Islands with real offices in New York (you know who they are). Likewise, the “service company” based in the United States with the “head company” based offshore may also be subject to some changing around. In the future, it is possible we will see companies that will be purely based out of their location, such as the British Virgin Islands, with the team physically conducting business there.
Not so universal after all
The other side of this is that while the G7 makes up a huge amount of the global GDP, there are still massive players such as India, China and Russia which are not included in these new rules. They have not even signed up for them. And it’s hard to tell whether they will even adopt them at all. Likewise, countries such as Singapore and Ukraine have excellent tax rules for companies simply looking to do business there with minimal presence.
The right to set your own tax rules is a massive sovereign right. Countries will not want to quickly give that up — especially countries that heavily rely on the income from corporate formations and companies doing business within their otherwise unheard of shores. Additionally, make no mistake that this whole process has been driven by the U.S. The U.S. knows that it is losing money by allowing companies to move funds away from the U.S. in a corporate setting. This is something they have been desperate to stop, with ever more cumbersome tax laws for individuals and corporations. Countries like Russia will not want to seem like they are being pushed around by the U.S.
For now, the best thing that all crypto companies can do is watch the development and implementation of these taxes. If, upon deployment of the new rules, the taxes are massively overbearing, many may wish to look at new locations and physical offices — especially those who make more than 10% profit and, more importantly, those who conduct business in one location with good taxes, but have their physical offices in another location. Nobody needs to panic now. However, their five or ten year plan may want to see some adjustments just in case the worst happens.
Finally, it should always be remembered that tax evasion is illegal and should not be done. Tax avoidance, on the other hand, is just smart planning and always worth spending time and money to implement properly.
This article is for general information purposes and is not intended to be and should not be taken as legal advice.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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