Global minimum tax negotiations focus on carve-outs, EU consensus, closing deal

By Doug Connolly, MNE Tax

With one week until 140 nations meet to review refined terms to the historic international tax agreement reached in July, negotiators are seeking to achieve final consensus on the details of the global minimum tax deal. Talks are centering on the terms for carve-outs and other technical aspects that might bring into the fold remaining holdouts, according to September 29 comments from European Commission official Benjamin Angel.

Speaking at a conference coordinated by the European Commission and EU Tax Observatory on the fiscal and distributional consequences of global tax avoidance and tax evasion, Angel said that a final deal is “extremely close” – while adding, however, that with 140 countries “one has to be cautious until the very end.”

In the same conference, European Commissioner for Economy Paolo Gentiloni stated in closing comments that negotiations are in “crucial days” between now and October 8. Further steps must be made in the agreement to make it “possible for the G20 to adopt the agreement in a more advanced way” later in the month.

The 140-nation Inclusive Framework is scheduled to meet on October 8 to assess progress on the agreement since their previous meeting that led up to the July 1 statement. The G20 finance ministers will meet the following week, and a G20 summit is scheduled for the end of October. The G7 finance ministers meanwhile continue to meet virtually, with their talks reaching a “common understanding” on some important remaining issues, according to reports on the meetings from both the US and UK governments.

EU’s holdouts

Angel, who is director of direct taxation at the European Commission, explained that substantial progress has been made in talks with the three EU member states that have yet to sign onto the global minimum tax: Estonia, Hungary, and Ireland. Beyond these three countries, three additional Inclusive Framework countries – Kenya, Nigeria, and Sri Lanka – have also so far declined to endorse the deal. However, the European holdouts are arguably more problematic due to their potential to jeopardize implementation of a deal within the EU.

Regarding Ireland, Angel noted the country’s evolving political position on the agreement, as discussed in recent press reports. The Irish government – which had been fiercely defending its 12.5% corporate tax rate – has reportedly indicated it could get on board for the 15% rate, if it gets some assurance that the rate goes no higher.

With respect to Estonia, Angel stated that there have been “technical developments in the last days” that “are very likely to help addressing their concerns.” Estonia’s headline corporate tax rate is already above 15%, but it has expressed concern about how the agreement would interact with its domestic tax regime.

Hungary – with its 9% corporate tax rate and harsh criticism of the global minimum tax proposal – presents perhaps the biggest hurdle for a united EU on the agreement. Negotiations with Hungary are continuing, Angel noted, with a focus on the functioning of the substance carve-out, as well as some timing and implementation issues. Nonetheless, he added, “substantial progress is being made” with Hungary.

Refining carve-out terms

Ongoing negotiations over carve-outs from the global minimum tax, Angel explained, reflect the conflicting viewpoints of the jurisdictions in the talks. On the one side are countries that seek a hard floor to tax competition to stop the “race to the bottom.” On the other side are those that would prefer the agreement to be more of an extension of the OECD’s base erosion and profit shifting (BEPS) project – with a focus on deterring artificial profit shifting but not tax competition.

In this respect, debates on the minimum tax carve-out are leading to a reevaluation of the duration of the transition, Angel said. The July 1 agreement envisioned a substance carve-out from the global minimum tax – applied via the global anti-base erosion (GloBE) rules – equal to 5% of the value of tangible assets and payroll. During an initial five-year transition period, the carve-out rate would be 7.5%. However, Angel stated, “it is being explored at the moment whether maybe consensus could be found by playing with the parameters of the transition.” He declined to give further detail, noting the discussion is ongoing.

Angel did offer that a consensus has been reached that a de minimis exclusion is needed. The July 1 agreement had stated there would be a de minimis carve-out without defining further applicable terms. “So when there is clearly a very small turnover and profit of a company in a jurisdiction that would be out,” Angel explained. He added that the exact level of the exclusion would be made public as soon as practicable.