U.S. and global effects of G-7's agreement on a 15% global minimum tax
Broader consensus could end race to the bottom, establish certainty
The recent agreement by G-7 finance ministers and central bank governors to establish a 15% global minimum tax has triggered new questions about ending the race to the bottom in corporate taxation.
Will the agreement be supported by the G-20 and rest of the world? How likely is it that the U.S. Congress and other sovereign legislative bodies would enact proposed changes? And how might a global minimum tax interplay with countries’ various tax structures and agendas, including changes proposed by the Biden administration?
In this global tax edition of “Tax Policy Now,” Ayana Martinez, senior manager in the international services group of RSM’s Washington National Tax practice, and Mario van den Broek, a tax and business consulting partner from RSM’s Netherlands office, joined Public Affairs Leader Dan Ginsburg to discuss those topics and more. Below is a transcript of their conversation, edited for clarity:
Dan Ginsburg: G-7 finance ministers and central bank governors on June 5 announced they intend to establish a 15% global minimum tax in what U.S. 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 U.S. and around the world.”
Mario, what exactly has been agreed to, and by whom?
Mario van den Broek: The G-7 came up with a proposal to agree to a corporate global minimum tax rate of 15%, and I think the “unprecedented” part is that it really is a signal to stop the race to the bottom. A lot of countries, especially tax havens, they wanted to come up with lower rates. In that sense, the G-7 is sending a signal. And, obviously, what is also unprecedented is the global consensus. Now we’ll have to see if the rest of the world will follow. But certainly it’s a strong signal.
Dan: As you suggested, there certainly are complexities to come. It’s just the beginning of the process, but give us a sense of how likely you think it is that this agreement will actually be implemented. And where are we, actually, in the process?
Mario: On the one hand, it’s still a complicated process because now it has to be presented to the G-20 next month. There is a strong chance they will agree as well. But then you’d have to come up with an agreement, probably in October, and then the fun really starts for the rest of the world.
There are already countries, like Ireland, protesting against the 15% percent; they themselves have 12.5%. But on the other hand, there has already been a lot of international consensus on taxation and the fight against tax evasion. So I would say there’s a strong chance. I’m not sure if it will be 15%, but a strong chance that the consensus will hold up.
Dan: You suggested, though, that any agreement, of course, is going to need to be ratified by each of the individual countries involved, including the U.S., where current tax policy negotiations are complex, to say the least. It also appears that over half of the profits from tax revenues under the agreement would come from only the largest companies in the world, most of which are U.S. companies.
So, with that as a backdrop, Ayana, let’s turn to you. How is this being received in the U.S.?
Ayana Martinez: You’re correct. The OECD (Organisation for Economic Co-operation and Development) is really focused on the larger companies, which are in the U.S., and not necessarily the middle market. Further, the U.S. minimum tax is 21%, as opposed to the G-7’s 15%. So large U.S. companies are actually already looking down the barrel of a 21% rate on global income.
But large companies welcome it—more certainty and less exposure. And when these types of agreements are reached, there really is an optimistic assumption that there will be a coordinated approach across multiple jurisdictions. The last thing that large corporations want is to be taxed on the same income in multiple jurisdictions, so these types of proposals should minimize potential double taxation—and they’re welcomed.
Dan: Interesting. The EU, of course, has separate initiatives focused on taxing the digital economy, as Mario mentioned earlier. How does this 15% proposal sync, or not, with the current EU proposals?
Mario: I think, certainly, it may be viewed as complementary, but the EU has an agenda of its own. Obviously, the EU is an interesting dynamic and environment not always based on consensus. But, in essence, it’s complementary.
It’s important to understand that since the origin of BEPS (base erosion and profit shifting) in 2013, the EU has been trying to come up with a solution to deal with the tech industry—and not always successfully. We’ve already seen several countries, even within the EU, take their own initiatives. That is a pitfall here that we have to be conscious of. Individual countries may not think it is going quickly enough.
In all, I think the EU embraces it, also because of the fact there’s large EU representation in the G-7. But at the same time, they will probably follow a parallel route, their own plans, and see what the G-7 and the rest of the world will come up with.
Dan: Beyond the core 15% tax rate itself, what else has been shared, exactly, about what is going to be taxed and how? For instance, how would it impact U.S. shareholders who are already subject to global intangible low-taxed income, or, as it is more commonly known, GILTI? Ayana, what are your thoughts?
Ayana: GILTI was enacted as a part of the Tax Cuts and Jobs Act and basically expanded the U.S. tax base. The Biden administration proposes to increase this GILTI rate from 10.5% to a 21% effective rate. So how does this interplay with the potential global minimum tax of 15%? A hypothetical really is helpful here.
Let’s say the U.S. settles on a 21% rate for GILTI, and a U.S. multinational invests in Ireland, for example, which Mario mentioned has a 12.5% corporate income tax. Then theoretically, the U.S. applies an extra 8.5% on those earnings to make up the difference.
Let’s assume that the U.S. multinational also invests in Germany with a 29% or 30% tax rate. Since this is above that 21% rate, the U.S. would not apply an extra tax. But the issue is really that U.S. multinationals under the current proposals around GILTI could effectively end up paying a surtax on profits in certain jurisdictions.
The 21% is a pre-credit effective tax rate and doesn’t consider applicable foreign tax credits. But if the 21% can be lowered closer to the 15%, it does make U.S. companies a little bit more competitive.
Simply looking at the proposed corporate income tax rate of 28%, though, and that 21%, you still have a gap. And if that gap between the GILTI rate and the corporate rate remains, taxpayers would still receive some benefit from operating outside the U.S.
Also, listen, there are many other nontax reasons to operate in various jurisdictions. And perhaps there is some negotiation to get that 21% on GILTI closer to 15%, because I think it will be hard to argue by the administration that 21% is the correct number when the OECD is at 15%.
Dan: So, let’s break it down. If you’re a U.S.-based multinational business, how should you be reacting to this news? Are there any steps you should be taking now to prepare?
During conversations on Saturday June 5, 2021, the G7 made historic strides toward multilateral agreement on a 15% global minimum tax rate.
The international tax landscape is shifting based on recent reports from the White House, Senate Finance Committee and U.S. Treasury.