G-7 FINANCE MINISTERS ANNOUNCE SUPPORT FOR GLOBAL MINIMUM TAX AND NEW ALLOCATION RULES
29 July 2021
Monika Loving | Managing Partner, International Tax Services National Practice Leader
Laurie Dicker | National Transfer Pricing Technical Leader
Michael Masciangelo | Client Services Executive, International Tax Services
The Group of Seven finance ministers on June 5 issued a statement in support of a 15% global minimum tax imposed on a country-by-country basis, and expressed a commitment to reaching “an equitable solution” on the allocation of taxing rights among jurisdictions.
The G-7 ministers, representing Canada, France, Germany, Italy, Japan, the UK and the U.S., met in London on June 4-5 to discuss economic initiatives to encourage deeper multilateral economic cooperation.
Pillars 1 and 2
The ministers endorsed the efforts being led by the G20/OECD Inclusive Framework to address the tax challenges arising from globalization and the digitalization of the economy and to adopt a global minimum tax. The OECD’s initiative centers around a two-pronged proposal issued in late 2019. Pillar 1 of the OECD blueprint would revamp tax allocation rules so that a portion of a multinational entity’s residual profit would be taxed in the jurisdiction where the revenue is sourced. Such an allocation would award taxing rights to market countries – broadly, those where a digital business’s users are located -- on at least 20% of profits that exceed a 10% margin in the case of the largest and most profitable multinational enterprises. Some of those profits would be allocated using a formula rather than the arm’s length standard. Pillar 2 focuses on the implementation of a global minimum tax.
The announcement in essence declares the ministers’ support for both Pillars 1 and 2 of the OECD plan, and advocates for the notion of reaching agreement on both pillars in tandem.
The ministers vowed to provide international coordination to apply the proposed international tax rules and repeal the various digital services taxes that have proliferated in recent years.
Treasury Secretary Janet Yellen issued remarks following the close of the finance ministers’ meeting decrying the “global race to the bottom” whereby countries compete by lowering their tax rates.
Yellen lauded the G-7 for taking significant steps by committing to a global minimum tax at a rate of “at least 15%.” She did not address the allocation of taxing rights– Pillar 1–in her comments, but at a subsequent press conference, Yellen acknowledged the agreement the finance ministers reached on that topic. Yellen added that the timing of implementation of the agreements remains to be worked out, and stated that “there is broad agreement that these two things go hand in hand.”
While achieving high-level political consensus on these international tax issues at the G-7 stage is an important milestone, it is only the first step in a long process.
The next step in that process is the June 30-July 1 meeting of the OECD’s 139-member Inclusive Framework in Paris.
The finance ministers in their communiqué stated their desire to reach agreement on these proposals at the next meeting of the G20 finance ministers and Central Bank governors, scheduled for July 9-10 in Venice. This meeting is expected to yield at least “the outline of a deal,” according to former OECD Secretary General Angel Gurría.
The international meetings will culminate at an Oct. 29-31 meeting of the G-20 leaders in Rome, where participants may finalize the international tax plan.
Domestic legislation in each individual jurisdiction will then have to be enacted to implement any agreement reached by the G-20 and the Inclusive Framework. The timeline for this broad global enactment is uncertain.