From 9 to 10 July, G20 finance ministers and central bank governors met in Venice to discuss a range of multilateral issues of interest to the world`s top 20 economies. As expected, these Cabinet officials approved a framework that would significantly change the international tax landscape. Representatives of the 20 countries attended the official communiqué issued at the end of the meeting, which said the group had reached a “historic agreement” on key elements of the ongoing international tax negotiations. In particular, the Group approved measures grouped into two policy initiatives: the first pillar and the second pillar. The first pillar is a political regime that would redistribute taxing rights for parts of the global profits of large multinationals. The second pillar is a policy initiative that would introduce a global minimum corporate tax. Current international tax reform efforts have essentially been underway since 2019 and have gained momentum since the Biden administration took office. Despite the support of the G20, the agreement and full implementation of an international agreement next year and beyond will require substantial refinement, consensus and the support of Congress. Observers might be forgiven for concluding that the first pillar appears to be an attempt to seize part of the US corporate tax base.
It`s important to recognize that unilateral attacks on the U.S. tax base are already underway in the form of Digital Services Taxes (DST), which tax companies with a digital footprint in jurisdictions even without a physical presence. This policy openly opposes international tax treaties, double taxation companies and calls for retaliatory tariffs. Under the agreement, newly allocated profits could be credited or exempted to avoid double taxation, an international dispute settlement mechanism would be established, and unilateral taxes such as DWTs would have to be abolished. While the first pillar may be a more orderly approach to an alternative tax and trade landscape characterized by NEWs and tariffs, neither perspective is particularly favorable to U.S. interests. The implementation of the first and second pillars also faces international challenges. As we have already mentioned, three EU members have not agreed on the framework. The adoption of tax measures in the EU usually requires unanimity. The agreement also stipulates that the exclusion of multinational enterprises “in the initial phase of their international activity” from the second pillar will be “studied”.
This note seems to indicate the possibility of an exemption for Chinese companies. A deal that would see U.S. companies face new taxes abroad, but consider China harmless, would be difficult to rationalize. Finally, important technical refinements, political developments and consultations still need to be carried out before a final agreement can be meaningful. While it`s clearly designed to capture profitable tech companies, it essentially only covers multinational companies that “look” like profitable tech companies. In fact, Amazon, one of the most attractive global tech companies, is not very profitable. With a profit margin of 6.3%, it would not fall within the scope of the first pillar. However, the latest agreement allows for segmentation, with the first pillar applying to certain areas of the business, such as Amazon`s web services.
In addition, the agreement provides for lowering the revenue threshold for the application of the first pillar to €10 billion, after having been in force for at least 7 years. The international agreement is not automatically applicable. It must first be implemented by the signatories. At EU level, the European Commission plans to propose a directive on the second pillar shortly after the publication of the technical proposal to ensure harmonised implementation of the agreement. A directive on the first pillar could also follow in 2022. All EU Member States, with the exception of Cyprus, are part of the inclusive framework and have accepted the international agreement. Cyprus also seems to support it. Therefore, the adoption of a European directive is not likely to lead to complications, as the Commission also seems willing to strictly respect the international agreement. EU Member States would then have to transpose the directives into national law for them to enter into force. The members of the Inclusive Framework have committed to implement the rules set out in the final technical proposal if they choose to implement them and, if they do not, to respect the application of the second pillar rules by other jurisdictions in accordance with the technical proposal.
Exceptionally, countries and territories can define the scope more strictly and apply the IIR to multinational groups of companies that do not reach the global turnover threshold of €750 million. The model rules for the second pillar, including a model treaty provision for the STTR, are expected to be published by the end of November 2021, with this multilateral instrument open for signature and ratification in 2022. The IIR, SOR and STTR would then apply from 2023, and the UTPR would enter into force from 2024. The interaction with GILTI will depend, among other things, on the announced US tax reform. Note: This article was originally published on July 1, 2021, but has been updated to reflect the latest details of the global tax treaty. In recent years, countries have debated significant changes to international tax rules that apply to multinational enterprises. Following an announcement by countries involved in the Organisation for Economic Co-operation and Development (OECD) negotiations in July, another agreement was reached today on a framework for new tax rules. If fully implemented, large U.S.
companies would pay less to the U.S. government and more to foreign governments, while companies` foreign profits would be exposed to higher taxes. There are three reasons for this. First, the priorities that President Biden has set for taxes on U.S. companies` foreign profits take a different approach than the one agreed upon today. Second, the current Global Tax on Intangible Income (GILTI) and the Base Erosion and Anti-Abuse Tax (BEAT) are only roughly aligned with the new agreement, but GILTI could benefit from special treatment in broad outline. Third, amending the tax treaty requires 67 votes in the Senate, which will prove difficult if there is not broad bipartisan support for the new rules. The first is an “income inclusion rule” that determines when a corporation`s foreign income must be included in the parent corporation`s taxable income. The agreement sets the effective minimum tax rate at 15%, otherwise additional taxes would be due in a company`s home jurisdiction. The broadest forum to negotiate and refine these policy initiatives is known as an inclusive framework and includes 139 countries under the auspices of the OECD and the G20.
Recent critical progress in these efforts has necessarily been among the most developed economies in the world. Since the Biden administration took office, U.S. involvement in this process has been more accommodating. In fact, the U.S. joined the other 6 G7 countries and supported pillars one and two in early June. The G20 communiqué and the agreement reached by 132 of the 139 members of the Inclusive Framework reflect a broader consensus among a more diverse group of economies – perhaps most visibly China – and underscore the growing momentum for a broader agreement. However, the absence of three EU members – Ireland, Estonia and Hungry – and four African countries, including Nigeria, an economy larger than the EU`s three recalcitrants, underscores the reality that there is still a long way to go to fully implement the policy. Successive announcements of agreements between increasingly broad groups of nations on new international tax rules indicate a high probability of a broader introduction of new tax rights for parts of the world`s largest corporations and a new global minimum tax. These new rules reflect the interest of participating members in raising taxes on multinational corporations and restricting tax competition. However, not all countries share this interest, and it is not certain that the high-level agreements of the summer will lead to a global agreement in the fine print.
In 2015, the Organisation for Economic Co-operation and Development (OECD), a supranational forum for the world`s 38 largest industrialised countries, published its Base Erosion and Profit Shifting (BEPS) Action Plan, a 15-point plan to identify and address member states` concerns about tax evasion by large multinational companies. Action point 1 of the BEPS project was to overcome tax challenges through the digitalisation of the economy. In 2018 and 2019, renewed efforts and attention were devoted to this concern, and in May 2019, the G20 and other countries agreed on a work plan to develop strategies that address these concerns. The work plan divided the policy response into two pillars: the first pillar would deal with tax duties, essentially the extent to which companies can be taxed if they do not have a physical presence in a tax jurisdiction; and the second pillar would introduce a global minimum corporate tax. These policy pillars were developed over the following year. The main parameters and concepts that would influence this policy were developed and formulated in plans for the first and second pillars, which were published in October 2020. Although the master plans are not a consensus product, they have been approved as a basis for completed multilateral policy initiatives. .