On June 5, 2021 the G7 Finance Ministers and Central Bank Governors issued a Communiqué announcing their intent to establish a 15% global minimum tax, in what Treasury Secretary Janet Yellen stated was an “unprecedented commitment… that would end the race-to-the-bottom in corporate taxation, and ensure fairness for the middle class and working people in the US and around the world”. The Group of Seven (G7) is a delegation of some of the wealthiest democracies around the world, including Canada, France, Germany, Italy, Japan, France, the United Kingdom and the United States. While it is not entirely clear at this time, representatives have suggested that the global minimum tax would affect only large multinational enterprises that have a profit margin of at least 10%. However, these criteria could change during the process and other criteria may also apply.
In the wake of a global pandemic, countries around the world have an urgent need to generate revenue in order to boost their respective economies. Based on the report issued by the EU Tax Observatory, a 15% global minimum tax would generate approximately €50 billion revenue per year in the European Union. The Made in America Tax Plan Report released in early April by the U.S. Department of the Treasury estimates a 15% global minimum tax will generate approximately $500 billion over the next 10 years. For additional information on the international tax implications from the Biden administration, please refer to Biden tax plan: International tax implications.
Countries around the world have been trying to implement measures to reform international taxation for quite some time. In 2016, The Organization for Economic Cooperation and Development (OECD) finalized proposals designed to stop base erosion and profit shifting (BEPS). Base erosion and profit shifting strategies legally shift profits from higher tax jurisdictions to lower tax jurisdictions (e.g. tax havens such as the Cayman Islands or Ireland with low corporate tax rates), thereby eroding the tax base in higher tax jurisdictions. Last year, the OECD issued proposals to tax digital services while many countries have already enacted digital services taxes. The new G7 proposal would supersede existing digital services taxes.
In 2013, the OECD began the BEPS Project in order to establish an international framework to prevent base erosion and profit shifting. The project was comprised of G20 and OECD countries. From this work stemmed the OECD project Action 1 in 2015, which addressed the new tax challenges arising from an increasingly digital economy.
In 2019, the blueprints for OECD Pillars One and Two were published. Pillar One addressed profit allocation and nexus issues within a digital economy that was no longer reliant on “brick and mortar” type establishments, thus allowing countries to tax companies accessing a market through digital means even if they lacked a permanent establishment (PE). Thus, under Pillar One, companies categorized as Automated Digital Services (ADS) (e.g. online advertising and marketplaces, online search engines, social media platforms, digital content services, cloud computing services, sales from user data, digital intermediary services, etc.) or as Consumer Facing Businesses (CFB) (more traditional business that sell to goods and services to consumers that includes franchising and licensing) and meet certain threshold requirements (currently €750 million or $850 million under Pillar One) could be taxed in a jurisdiction even if the company had no physical presence in that jurisdiction. Pillar Two looked at creating a level playing field with a global minimum tax, similar to the U.S. concept underlying global intangible low-taxed income (GILTI). Pillar Two aimed at preventing base-erosion and profit shifting by large multinational enterprises who use low tax jurisdictions to shelter their income
While the OECD Pillar One and Pillar Two projects intended to create a framework for a new international tax system through a multilateral approach, consensus among the various countries for establishing this framework has been difficult to achieve. As a result, many countries have implemented their own unilateral measures, particularly in regards to a digital services tax (DST) in line with Pillar One. One of the reasons that consensus has proven to be difficult is that the Pillars are quite complex and countries have disagreed on how best to implement the measures. Additionally, the Trump Administration opposed the Pillar One and Pillar Two proposals because they claimed that these measures unfairly discriminated against U.S. tech companies in particular, and threatened to impose tariffs against nations that took unilateral measures to implement their own DST. We note that over half of the profit from tax revenues under both Pillars would only come from 100 MNE groups, most of which are U.S. companies.
While the G7 announcement relating to a proposed 15% global minimum tax is a huge step forward on the OECD proposed Pillar Two initiative, it is unclear whether global consensus is possible beyond the G7. That said, the G7 intends to promote the idea of the 15% global minimum tax to the Group of 20 (G20) at the meeting next month in Italy. If they reach consensus, a deal could potentially be signed as early as October of this year; however, countries such as Ireland with a 12.5% corporate income tax rate will likely oppose a 15% global minimum tax. Even if representatives at the G20 achieve consensus, legislation would likely need to be approved by the legislatures of each country that agrees to implement a global minimum tax.
While these measures could take several years to implement, U.S. MNEs will want to watch this space closely and should model potential implications of these proposals. Additionally, U.S. taxpayers should be mindful that compliance related to these measures could be costly.