Out-Law News | 08 Jun 2021 | 9:27 am | 3 min. read
Finance ministers from the G7 countries have agreed a proposal for a 15% minimum tax rate for multinational groups together with new rules for allocating the taxing rights over the largest international companies.
The agreement was reached at a meeting of finance ministers of the US, the UK, Germany, France, Italy, Japan and Canada (the G7) in London on 4 and 5 June.
The US has been pushing for a global minimum tax rate, initially proposing that the minimum tax rate should be 21%, but last month reducing this to at least 15%.
According to BBC, US treasury secretary Janet Yellen said the "historic" deal would "end the race to the bottom in corporate taxation and ensure fairness for the middle class and working people in the US around the world".
The UK finance minister Rishi Sunak said the deal would make the global tax system "fit for the global digital age".
“For countries such as the UK and France the important part of this deal is not actually the minimum tax rate but the other half of the picture – the new taxing rights for ‘market countries’ – and they are unwilling to see one progress without the other,” said Eloise Walker, a corporate tax expert at Pinsent Masons, the law firm behind Out-Law. “This will result in increased tax revenue for countries where the tech giants have large numbers of users or customers, but not enough of a physical presence to result in local tax liabilities under the current international tax rules.”
The G7 finance ministers agreed that market countries would be awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises, according to the communiqué issued following the conference.
At the request of the G20, the Organisation for Economic Cooperation and Development (OECD) has been working on proposals for addressing the tax challenges of the digitalisation of the economy for a number of years.
In October 2020 the OECD published 'blueprints' of its proposals. The proposals are divided into two 'pillars'. Pillar one addresses the allocation of taxing rights between jurisdictions and considers proposals for new profit allocation and nexus rules, which would give countries where multinationals have significant numbers of customers taxing rights over a slice of the profits. Pillar two seeks to ensure that multinationals pay a minimum level of tax, regardless of where they are headquartered or the jurisdictions in which they operate.
Walker said: “139 jurisdictions are involved in the OECD’s negotiations so it is not up to the G7 or even the G20 to say what reforms should be made. However, if the G7 countries are in agreement, it is much more likely that international consensus will be reached at the OECD.”
The next important date is the G20 finance ministers’ meeting taking place in Venice on 9 and 10 July.
“We agree on the importance of progressing agreement in parallel on both Pillars and look forward to reaching an agreement at the July meeting of G20 Finance Ministers and Central Bank Governors,” the communiqué said.
The G7 finance ministers also agreed to “provide for appropriate coordination between the application of the new international tax rules and the removal of all digital services taxes”.
In response to the slow progress made by the OECD on the pillar one proposals, the UK and a number of other countries have introduced unilateral digital services taxes (DSTs) on the revenue derived in their territories of digital companies such as social media platforms, search engines and online marketplaces.
The US considers that DSTs discriminate against US digital companies. Last week the US Trade Representative’s Office announced and then immediately suspended 25% tariffs on certain imports from six countries including the UK and Spain in retaliation for their DSTs.
“Although the US has been pushing for countries like the UK and France to immediately drop their DSTs, it looks from the wording of the communiqué that these countries have stood firm and will only drop their DSTs once the new taxing rights are ratified,” Walker said. “An important point to bear in mind is that whatever is agreed at the G7 or the G20, the proposals will need to be agreed in the US congress, where there is likely to be opposition to the giving up of some of the US’s taxing rights in relation to the tech giants which the pillar one proposals will involve”.