G7 tax breakthrough sets stage for G20 talks in July, issues remain

By Doug Connolly, MNE Tax

G7 finance ministers reached a momentous agreement on June 5 on a global corporate minimum tax and changes to the allocation of taxing rights between nations. The specific details of this agreement will be the presumptive starting point for formal negotiations at the G20 level in July.

However, further details remain to be negotiated, and questions remain about the acceptability of the specified terms to the remaining G20 nations, as well as to smaller countries represented in the “Inclusive Framework.”

The agreed terms were stipulated in a communiqué issued by the G7 nations following a meeting of the countries’ finance ministers in London on June 4–5. The G7 includes Canada, France, Germany, Italy, Japan, the UK, and the US.

US Treasury Secretary Janet Yellen called the agreement “a significant, unprecedented commitment that provides tremendous momentum.”

She added that a minimum tax deal would end the “race to the bottom” on corporate tax rates, allow countries to compete for businesses on other factors like workforce training and infrastructure, and give countries a boost in tax revenues to invest in such factors.

Global minimum tax terms

Under the OECD’s “Pillar 2” talks on a global minimum tax, the G7 countries committed to “a global minimum tax of at least 15%.” They also agreed that the tax would apply on “a country by country basis.”

The US last month had announced that it would agree to a rate as low as 15% – down from the 21% rate it initially sought. The concession seemed likely to boost odds for an agreement, but questions remained about such a deal even at the G7 level. The UK, in particular, seemed reluctant to adopt a minimum tax, even one set well below its own corporate tax rate.

The commitment to the minimum tax being applied on a county-by-country basis is also significant. The current US global minimum tax – i.e., the tax on global intangible low-taxed income (GILTI) – allows blending of income in low-tax jurisdictions with income in high-tax jurisdictions, diminishing the applicability of the tax.

The Biden Administration stated in its Green Book tax proposals that it would seek to change the US minimum tax to country-by-country calculation. A UK official had indicated that the US’s willingness – and ability – to pass such a change would affect the rate agreed to for a global minimum tax.

Agreement on allocation of taxing rights

With respect to the OECD’s “Pillar 1” talks on the partial re-allocation of taxing rights between nations, the G7 countries agreed that market countries would be “awarded taxing rights on at least 20% of profit exceeding a 10% margin.”

The reallocation would apply, under the agreement, “for the largest and most profitable multinational enterprises.”

The agreement further specifies that the new rules should be coordinated with “removal of all Digital Services Taxes.”

Pillar 1 was initially focused on reallocating taxing rights, specifically of digital companies and digital activities, with an aim to give market jurisdictions more rights to tax digital services provided in their countries by companies that do not have a significant physical presence there.

The US objected to such an approach, considering it to disproportionately affect large, US-based digital companies like Google and Facebook. Accordingly, the US proposed an alternative in April focused on the largest multinational companies, regardless of sector.

While many countries, the UK among them, have remained primarily interested in addressing digital taxation, the approach for doing so put forward by the OECD in its “blueprint” late last year has generally been deemed overly complicated. The US approach is considered more administrable.

In addition to shifting Pillar 1 away from a digital-only focus, the US has also sought to ensure that the agreement is tied to the removal of digital service taxes that some countries have enacted as unilateral measures. In this respect, the US had recently threatened tariffs against the UK and other countries over their digital taxes if an international tax deal is not reached.

The OECD has already begun working on a plan to eliminate unilateral measures as part of a broader agreement.

Remaining obstacles and issues

While an agreement between the G7 nations is a notable achievement, the negotiations on a new international tax regime are formally being held by the G20 with the support of the OECD and in consultation with the Inclusive Framework, which includes 139 nations.

At the G20 level, questions remain particularly with respect to China’s willingness to agree to the terms set forth by the G7. Meanwhile, smaller countries with relatively low corporate tax rates, Ireland among them, have been vocal opponents of a global minimum tax.

Asked about China and Ireland as potential obstacles to a deal, Yellen acknowledged that there remain countries with concerns and that some details still need to be worked out. However, she added that she believes the G7 deal will create the momentum to reach a preliminary agreement at the G20 level next month, with details finalized in the fall.

Yellen said that if an agreement is reached at the G20 level, many smaller countries would likely sign on to a corporate minimum tax, given the weight of those countries’ economies as a percentage of global GDP. However, for those that do not, there will be an enforcement mechanism to pressure those countries to comply, she said.

“It doesn’t require absolute agreement across the board,” Yellen said. “It has a way of bringing holdouts into it.”

Yellen was also asked whether the US Congress would get on board for Pillar 1 and what would be the benefit to the US of such an agreement. Yellen answered that the agreement would bring a level of certainty to US companies in an environment that has been “very unstable.”

Notably, in this respect, Amazon, Facebook, and Google have all already expressed support for the G7 agreement, as reported in Business Insider, CNBC, and Reuters.

US Republicans had expressed concerns about the impact of such a deal on US companies.

In addition, to overcoming the obstacles posed by countries opposed to such an agreement and the difficulties in passing a deal through the US Congress, technical issues also remain to be worked out.

For instance, while the communiqué agreed to a minimum tax of at least 15%, the US has stated it would still like to seek a higher rate.

Furthermore, countries will have to agree whether there will be carve-outs from that rate, either for certain types of tax incentives, as has been suggested may be necessary for China’s support, or for activities with economic substance.