On 5 June, the G7 Finance Ministers announced an agreement in which the participating countries committed to new taxing rights that allow countries to reallocate some portion of profits of large multinational companies to markets (i.e., where sales arise - “Pillar One”), as well as enact a global minimum tax rate of at least 15 percent (“Pillar Two”).
In the communique, the G7 Finance Ministers noted a commitment to “reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises. We will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies. We also commit to a global minimum tax of at least 15% on a country by country basis.”
The agreement entails winners and losers. At least in theory, large industrialized countries may benefit in the sense that the largest markets will attract most of the new income allocation under Pillar One. Under Pillar Two, many of them already have higher tax rates and often represent the headquartered jurisdiction which should receive a large part of the top-up in low-tax jurisdictions (if any). On the contrary smaller jurisdictions such as Ireland, Singapore and Switzerland may stand to lose some tax revenues under Pillar 1 and will face stiffer competition for inward investment as a result of Pillar 2. Developing countries may lose, but will certainly not win.
The G7 members – Canada, France, Germany, Italy, Japan, United Kingdom, and United States – have no formal power to fashion an agreement that is binding on other countries, although as the largest world economies any actions taken often have significant effects on global issues.
The next important test for the agreement is the next G20 meeting. Any decision taken by the G20 at their upcoming Finance Ministers meeting on 7-8 July in Venice is more likely to determine the forward movement of the OECD’s project on the tax challenges arising from the digitalizing economy. The G20 includes countries like Brazil, China, India and Russia, which to date have been more hesitant on some of the elements discussed in the OECD’s Pillars One and Two. The G20 countries account for a major share of global economic investment, production, and corporate tax base, so any agreement in July would go a long way in creating a consensus of how mostly developed economies intend to resolve frustrations voiced around the current international tax rules.
Some public officials and media outlets have termed the agreement as “historic” and given the sense that global adoption is inevitable. While there is a general open attitude toward finding global consensus on a solution, there remain numerous political and technical elements of disagreement among countries that would somehow have to be bridged for real consensus to emerge. There is also an implementation challenge as the European Union – which forms an important bloc of economic power – must unanimously agree to legal changes for tax issues; to date, several EU members have expressed strong opposition to any global minimum tax that impinges on their sovereignty to establish corporate tax rates, especially if the agreed rate is set at a level such as the 15% or above.
Our takeaway is that while much attention in the coming days will be focused on the statements from the G7 meeting, the most important indicator of whether major corporate tax changes are coming is any determinations made by the G20 Finance Ministers next month. Even with an agreement in July implementation is likely to take several years.
Recent Comments