G7 finance ministers, at their meeting in Chantilly, France on July 17–18, agreed to several aspects of a revised system for taxing multinationals. According to the ministers, the international tax and transfer pricing rules should be updated with new nexus rules for determining which countries can tax multinational group profits, by imposing a coordinated minimum tax on multinationals, and by requiring countries to adopt mandatory binding arbitration of cross-border tax disputes.
“It is urgent to address the tax challenges raised by the digitalization of the economy and the shortcomings of the current transfer pricing system,” said finance ministers from the G7 countries of Canada, France, Germany, Italy, Japan, the UK, and the US, according to a summary released after their meeting.
The work plan provides a process for reaching global consensus on revised rules for taxing multinational groups by the end of 2020, responding to countries’ concerns that multinational digital firms can take advantage of outdated rules to skirt taxation.
The G7 finance ministers said they approved of the development of new nexus rules giving countries the right to tax a business’s profits even if the business does not have physical presence, as is the case with digital businesses.
Also, the ministers agreed that transfer pricing rules for distribution activities need to be changed to prevent aggressive tax planning and enhance tax certainty.
Further, the group agreed that the OECD should explore whether “[t]he new taxing rights under pillar one could be determined by reference to criteria reflecting the level of businesses’ active participation in a customers’ or users’ jurisdiction, such as valuable intangibles or employment of a highly digitalized model.”
The G7 ministers said that while it is important to improve the current international tax framework, it is necessary to do so without “undermining its principles” — a likely a reference to the group’s desire to retain the arm’s length principle as a guideline for transfer pricing.
Concerning pillar 2, the finance ministers agreed that new rules ensuring a minimum level of effective taxation would contribute to ensuring that companies pay their fair share of tax. They said that rules similar to the US global intangible low-taxed income (GILTI) might be appropriate.
The ministers also agreed that mandatory binding arbitration needs to be part of any global deal.
“To avoid double taxation and ensure the stability of the international tax system, robust and effective tax dispute resolution through mandatory arbitration must be a component of this global solution,” the ministers said.
Mandatory binding arbitration would apply when two or more countries claim the right tax the same multinational group profit and tax administrations can’t reach a compromise, ensuring that multinationals are not taxed twice on the same income. While many countries add mandatory binding arbitration provisions to their tax treaties, some countries are more skeptical of this mechanism, viewing it as infrininging on their sovereign right to tax a foreign company operating in their country.
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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