G7 tax plan/UK banks: Sunak takes to the barricades

Rishi Sunak wants to reinforce the crumbling walls of the City of London. The UK chancellor is seeking exemptions for City banks from planned G7 tax reforms, pointing to their possible interplay with capital buffers.

The move smacks of belated remorse. The UK government neglected City interests in striking a trade deal with the EU.

Sunak hopes to persuade counterparts to see the light amid forecast sunshine at a G7 meeting in England. Some will discern only murky exceptionalism.

Sunak’s problem with the G7 tax plan does not appear to involve the proposed 15 per cent global minimum rate. Most profitable banks pay more than that.

The main issue, according to the likes of the European Banking Federation, concerns allocation of profits and tax by country. The G7 plan is for nations to wield taxing rights over 20 per cent of profits above an earnings margin of 10 per cent.

Complex rules already govern where bank profits are allocated, typically involving a local banking licence and local capital buffers. Symmetry between tax levels and bank capital is important, since the latter depends partly on retained profits. Aligning existing rules with new G7 rules will create big costs for little gain, say opponents.

UK bank capital is hardly in short supply. On Lex’s estimate, the big five will have £24bn of excess capital by the end of 2021. A cynic might therefore suggest that the UK, a hub for multinational banks, fears losing tax revenue to other countries — particularly Asian ones via lenders such as HSBC — if rules are rejigged.

Bankers are more exercised by an impending update to Basel III capital rules than a G7 tax plan the US Congress may reject. A stricter regime for investment banking could mean UK banks require another €70bn of buffer capital, according to Copenhagen Economics.

Sunak is not alone in wanting a tax carve-out for financial services. But if he really wants to rebuild bridges with the City he should expend his political capital on ensuring bank capital is not inflated further by ambitious regulators.