The G20 endorsed the two-pillar proposal of the OECD Inclusive Framework (IF) an overall minimum tax rate of 15% and a redistribution of 25% of residual profits from the largest companies to market jurisdictions.
US Treasury Secretary Janet Yellen said: “Every G20 leader has endorsed a landmark agreement on new international tax rules, including a global minimum tax that will end the damaging race to the bottom in business tax”.
The deal also includes tax credits for companies facing Digital Services Taxes (DSTs) before the first pillar is implemented. This was a requirement of the United States to accept the residual profit reallocation framework under the first pillar.
The agreement to introduce a tax competition floor and a system of redistribution of corporate profits in more than 130 countries is significant. Yet several stakeholders said the solution disadvantages about 70 other countries outside the IC, as well as some developing countries within the IC as well.
The shortcomings of the global tax agreement
Several government leaders from emerging economies have suggested that the 25% limit on redistribution of residual profits is not high enough. The G24 Working Group on Tax Policy and International Tax Cooperation has called for at least 30% of non-current profits of multinationals to be reallocated to market jurisdictions to provide meaningful revenue to developing countries.
Nigerian Finance Minister Zainab Ahmed said in September that the deal had failed to achieve the goal of a “fair deal”. Nigeria has still not joined the agreement.
“[IF] member countries, including Argentina, have criticized the agreement as both unfair and ineffective against corporate tax abuse,” said Alex Cobham, chief executive of the Tax Justice Network, during the G20 negotiations on the OECD two-pillar solution.
“Yet it was the G20 that gave the OECD the mandate to host the negotiations, despite widespread concerns that the OECD – a club of wealthy countries – would not be able to reflect the views non-members,” Cobham added.
Lawrence Summers, a Harvard University professor and former US Treasury secretary, agreed that countries not party to the deal would face consequences.
“Their own multinationals will lose the ability to fully deduct expenses when operating in countries that have joined the agreement,” Summers said. “This strong safety net reinforces incentives to join the regime and can eliminate the benefits of not joining.”
The shortcomings of the OECD’s two-pillar solution could lead the UN to support future iterations of the project to expand the scope of the rules more equitably for developing countries. The UN has already started work, with the adoption of Article 12B in its model tax rules for treaties, which highlights efforts to address limitations on the reallocation of first pillar profits.
The 70 non-IC members and the OECD two-pillar solution could instead opt for Article 12B.
While tax reform through the OECD’s two-pillar solution reached a definitive outcome at the G20 summit, other issues important to G20 leaders, including climate change, did not make the cut. object of a concrete consensus. Some stakeholders criticized the conference for its “poor” results.
Climate Change Discussions
Climate change-related fiscal policies were also high on leaders’ agendas at the October 31 G20 summit, as their economies emit most of the world’s carbon emissions. Leaders, for the first time, recognized carbon pricing mechanisms and incentives as key tools against climate change.
The inclusion of carbon pricing mechanisms in the G20 discussions matches the timeline in which the IMF is calling on countries to set a floor on carbon pricing. However, G20 leaders failed to commit to net zero emissions by 2050 at the summit. Achieving net zero emissions will likely require the use of a global carbon tax floor to ensure that a 2050 deadline can work.
French President Emmanuel Macron said the G20 summit was set up to ensure the success of the UN climate change conference (COP26) from October 31 to November 12, but “nothing is ever written before a COP”. Many tax experts have said RTI that they expect little or nothing to be decided on carbon taxation at COP26.
“We haven’t seen a global carbon tax, as expected,” a tax official at a US consumer goods company said of the G20 summit. “We could, however, see a firmer commitment to achieving net zero at COP26.”
After the mixed results of the G20 summit, the UN climate conference could lead to greater harmonization of carbon pricing, but full consensus is unlikely. The G20 outcome remains a commitment to set the overall minimum tax rate at 15% and the reallocation threshold at 25%, adding another layer of certainty for taxpayers to prepare for tax reforms by 2023.