May 28, 2022

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G7 Finance Ministers Agree On Allocation Of Taxing Rights And Global Minimum Tax Rate – Tax


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G7 Finance Ministers Agree On Allocation Of Taxing Rights And Global Minimum Tax Rate


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On 5 June, the G7 Finance Ministers announced an agreement in
which the participating countries committed to new taxing rights
that allow countries to reallocate some portion of profits of large
multinational companies to markets (i.e., where sales arise -
“Pillar One”), as well as enact a global minimum tax rate
of at least 15 percent (“Pillar Two”).

In the 
communique
, the G7 Finance Ministers noted a commitment to
“reaching an equitable solution on the allocation of taxing
rights, with market countries awarded taxing rights on at least 20{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb}
of profit exceeding a 10{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} margin for the largest and most
profitable multinational enterprises. We will provide for
appropriate coordination between the application of the new
international tax rules and the removal of all Digital Services
Taxes, and other relevant similar measures, on all companies. We
also commit to a global minimum tax of at least 15{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} on a country by
country basis.”

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The agreement entails winners and losers. At least in theory,
large industrialized countries may benefit in the sense that the
largest markets will attract most of the new income allocation
under Pillar One. Under Pillar Two, many of them already have
higher tax rates and often represent the headquartered jurisdiction
which should receive a large part of the top-up in low-tax
jurisdictions (if any). On the contrary smaller jurisdictions such
as Ireland, Singapore and Switzerland may stand to lose some tax
revenues under Pillar 1 and will face stiffer competition for
inward investment as a result of Pillar 2. Developing countries may
lose, but will certainly not win.

The G7 members – Canada, France, Germany, Italy, Japan,
United Kingdom, and United States – have no formal power to
fashion an agreement that is binding on other countries, although
as the largest world economies any actions taken often have
significant effects on global issues.

The next important test for the agreement is the next G20
meeting. Any decision taken by the G20 at their upcoming Finance
Ministers meeting on 7-8 July in Venice is more likely to determine
the forward movement of the OECD’s project on the tax
challenges arising from the digitalizing economy. The G20 includes
countries like Brazil, China, India and Russia, which to date have
been more hesitant on some of the elements discussed in the
OECD’s Pillars One and Two. The G20 countries account for a
major share of global economic investment, production, and
corporate tax base, so any agreement in July would go a long way in
creating a consensus of how mostly developed economies intend to
resolve frustrations voiced around the current international tax
rules.

Some public officials and media outlets have termed the
agreement as “historic” and given the sense that global
adoption is inevitable. While there is a general open attitude
toward finding global consensus on a solution, there remain
numerous political and technical elements of disagreement among
countries that would somehow have to be bridged for real consensus
to emerge. There is also an implementation challenge as the
European Union – which forms an important bloc of economic
power – must unanimously agree to legal changes for tax
issues; to date, several EU members have expressed strong
opposition to any global minimum tax that impinges on their
sovereignty to establish corporate tax rates, especially if the
agreed rate is set at a level such as the 15{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} or above.

Our takeaway is that while much attention in the coming days
will be focused on the statements from the G7 meeting, the most
important indicator of whether major corporate tax changes are
coming is any determinations made by the G20 Finance Ministers next
month. Even with an agreement in July implementation is likely to
take several years.

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