By Vasiliki Koukoulioti, doctoral researcher at Queen Mary University in London
The agreement on a comprehensive minimum tax reached by G7 finance ministers on June 5 has been greeted with great enthusiasm, but many questions remain about the details of the deal.
In addition, the imminent existence of a global consensus on the minimum tax or the new rules for attributing the benefits that accompany it depends on the reactions of the G20, which is due to meet in July, and of the Inclusive Framework OECD / G20. , made up of more than 135 member countries and jurisdictions.
At their meeting on June 4 and 5 in London, G7 finance ministers agreed on the principle of an overall minimum tax rate of at least 15% country by country. They further agreed to reach a fair solution on the allocation of taxing rights to market jurisdictions on at least 20% of profits exceeding a 10% margin for the largest and most profitable multinational companies, while by removing all taxes on digital services. They also stressed the importance of advancing the agreement on both in parallel.
Although the agreement creates a broad framework, it leaves many questions open. It does not deal with companies that will be selected and affected beyond the tech giants. It also does not define the tax base on which the minimum tax rate will apply.
In addition, it will remain necessary to consider how national tax systems and the existing network of double taxation treaties will need to be adapted to fit into this multilateral agreement. Problems related to the complexity of tax administration and collection also need to be addressed. These clarifications are necessary to avoid a significant increase in international tax disputes.
Above all, there will be winners and losers. Some initial studies estimate that tax reforms will weigh heavily on most developing and emerging economies, as well as some EU member states with preferential tax regimes, including Ireland, Luxembourg and the Netherlands. Meanwhile, the biggest savings could benefit the most.
Moreover, since any deal is based on removing all taxes on digital services, it is at this stage impossible to make an accurate assessment of the impact on countries and businesses.
However, most countries are already trying to quantify the net tax gains / losses from a global tax deal. This is especially true for developing and emerging economies which might face difficulties in attracting direct investment to their jurisdictions and raising much needed tax revenue if a minimum tax rate is agreed, causing a shift to other forms. competition.
The road to a global tax deal appears to be long, involving many technical and political complexities and challenges. The G7 deal will mean change for most countries, and it remains to be seen what the new landscape of cross-border taxation will look like.
Lead to the G7 agreement
The reform of the international tax system, seen as overtaken by globalization and digitization, and therefore as having created opportunities for corporate tax avoidance, especially by multinational companies, has been at the top of the tax agenda of the United States. ‘OECD / G20.
Since the launch of its Base Erosion and Profit Shifting (BEPS) project in 2013, the OECD has addressed, among other things, the challenges posed to the global tax system by digitization and the emergence of large tech companies. In this context, he proposed a two-pillar approach, adopted by the inclusive framework, to establish new rules for profit distribution and linkage (pillar I) and to introduce an overall minimum taxation (pillar II).
Until recently, the prospect of achieving a long-term, global consensus-based solution by the end of 2020 seemed unrealistic by most countries, especially given strong concerns from the United States about the mandatory character. new measures and the growing proliferation of taxes on digital services around the world that are seen by the United States as discriminatory against digital companies based in the United States.
Additionally, the COVID-19 pandemic has inevitably delayed any meaningful progress on this project, while increasing pressure on governments to collect additional tax revenue to fund the post-pandemic response and recovery. Thus, in this context of strong division of opinion and other priorities linked to the pandemic, the new deadline for a comprehensive solution was set for mid-2021, while skepticism about the feasibility of the project and the new timetable remained. .
Nonetheless, in April, the US Treasury, through its secretary, Janet Yellen, announced that it was working with the G20 to agree on a global minimum corporate tax rate that could stop the race to the bottom.
The initial rate of 21% was then revised to “at least” 15%, while the US Trade Representative announced his intention to maintain the possibility of imposing tariffs on certain products from countries applying taxes on the products. digital services.