Rishi Sunak wants to build up the crumbling walls of the City of London. A G7 plan could raise the corporate tax rate for the world’s largest companies, helping to cover budget deficits swelled by the pandemic. The UK chancellor is seeking exemptions for City banks, citing already high capital requirements.
The move smacks of belated remorse. The UK government neglected City interests in negotiating a trade deal with the EU. The question is whether Sunak can persuade counterparts to see the light amid forecast sunshine at a G7 meeting in England. Some will discern only murky exceptionalism.
The G7 plan would mean a global minimum rate of 15 per cent plus local levies for the world’s most profitable companies. How that is calculated needs clarification. Multinationals with profit margins above 10 per cent — pre or after tax is unknown — would then have a fifth of their global profits subject to further levies from individual governments where they operate.
Profit margins calculated for companies differ from banks. A large chunk of bank revenues derives from a net interest spread between loan interest and funding costs. Return on equity provides a better measure, on which UK banks trail far behind Apple or Microsoft.
Sunak could argue that higher taxes on profits reduce retained profits used for any capital buffer. But UK banks already have high buffers, well above any regulatory minimums. On Lex’s estimate, the big five will have £24bn of excess capital by the end of 2021.
The G7 tax plan seems less of a problem than banking regulation. A final update to Basel III international regulatory standards approaches. There is debate over using a stricter regime than previously agreed for banks with investment banking arms. This would mean UK banks require another €70bn of buffer capital, according to Copenhagen Research.
Sunak is not alone in wanting a tax carve-out for financial services. But basing it on an exemption on capital requirements does not follow. The chancellor would do better to expend his own capital — the political kind — on resisting pressure to increase buffers.