G7 agrees minimum global tax rate

G7 Finance Ministers have reached an agreement in principle on the introduction of a minimum global tax rate for the largest multinational corporations (MNEs). The agreement by the G7 would involve affected MNEs paying a minimum rate of tax of 15% and would also involve a redistribution of tax on profit margins above 10% to the countries in which those MNEs do business.

The agreement by the G7 is merely the first step for any such agreement to be introduced, however. It is expected that the matter will now be passed back to the OECD and the Inclusive Framework on BEPS for the details of the proposal to be fleshed out and for wider agreement within the international community to be achieved.

However, there is no doubt that this is a big step forward for attempts to reform the taxation of the largest MNEs, particularly those which have been able to locate in low tax jurisdictions and operate internationally without any local physical presence. In particular, the agreement of President Biden and the USA to the principle is a major development and has given the proposals renewed impetus.

Background

Discussions have been taking place for several years at the OECD concerning fundamental changes to the international tax landscape to deal with problems created by the digital economy.

The publication of a Policy Note and a Public Consultation in 2019 led to a number of proposals for reform, grouped under two "pillars": revised profit allocation and nexus rules (Pillar One); and a global anti-base erosion proposal for a minimum level of taxation (Pillar Two). "Secretariat Proposal for a "Unified Approach" under Pillar One”, put forward a proposal to define the scope, tax nexus and a new profit allocation rule for public comment. A public consultation document on Pillar Two, seeking solutions to the ongoing risks from structures which allow MNEs to shift profits to low tax jurisdictions through additional global anti-base erosion (GloBE) proposals, was published in November 2019.

In January 2020, the OECD delivered an update, "Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy", setting out the progress that had been made and this was followed in October 2020 by the publication of two blueprints for Pillar One and Pillar Two, whilst recognising that the original deadline for agreement (end 2020) was now unrealistic.

G7 agreement

The G7 agreement is clearly an important development be seen in the context of the OECD negotiations. It indicates that several of the the major nations have now agreed on the principles under which the Pillar One and Pillar Two proposals may be progressed and concluded. However, there will certainly be a lot of detail that the OECD will still need to finalise and there will be other countries that will need to be persuaded of this route forward.

Details of the agreement in principle are lacking in detail at this stage. However, on Pillar One the G7 press release indicates that “the largest and most profitable multinationals will be required to pay tax in the countries where they operate - and not just where they have their headquarters”. The change would appear to affect MNEs with at least a 10% profit margin and would require them to reallocate for tax purposes 20% of any profit above the 10% margin to the countries they operate in. Clearly. The basis for determining the profit margin and the extent that they “operate” in various countries will still need to be the subject of very detailed rules.

Under Pillar Two, the G7 also agreed to the principle of a 15% global minimum corporation tax operated on a country by country basis. This is designed to remove the incentive for businesses to locate in low tax jurisdictions, but again this will need to be the subject of further detailed negotiation through the OECD. It is understood that the US initially preferred to push for a 21% minimum tax rate, but was persuaded to reduce the level to 15% to achieve a broader consensus. Nevertheless, some major jurisdictions, most notably Ireland, will clearly be affected.

Discussions on the two Pillars have been ongoing for many years and the G7 agreement in principle will now be discussed in further detail at the G20 Financial Ministers & Central Bank Governors meeting in July 2021.