Introduction
On 5 June 2021, the G7 had a summit in London during which the Finance Ministers agreed on the implementation of a global corporate minimum tax of 15% (the “global minimum tax rate”) as detailed in a Communiqué released shortly thereafter (the “G7 Communiqué”).
Although the negotiation process has not yet ended, any final agreement on a global tax rate could result in significant changes in tax policies worldwide.
Context
Through this measure, G7 countries aim at discouraging MNEs, with a particular focus on digital services, from shifting taxable revenues to low-tax countries without regard to where their sales are realized. Income derived from intangible sources is specifically targeted in the G7 Communiqué (i.e., drug patents, software and royalties on intellectual property) as such revenues are highly volatile and a trend towards migrating them to low-tax jurisdictions is observed. Hence, by doing so, some MNEs manage to avoid paying the higher tax rates in the countries where they usually operate i.e., their respective home countries or the countries where their client base resides.
Background
The Organization for Economic Cooperation and Development (the “OECD”) has been coordinating tax negotiations among 140 countries over the past several years on rules for taxing cross-border digital services and tax evasion, including a global minimum tax rate.
The OECD and G20 countries aim to reach consensus on both by mid-year 2021. The OECD has estimated that the introduction of a global minimum tax rate of 15% could allow for additional tax receipts of USD 50 billion to USD 80 billion worldwide.
Practical implementation of the global minimum tax rate
The global minimum tax rate would apply to overseas profits. However, G7 countries should not be bound to apply specific rules for the application of the global minimum tax rate. The sole requirement would be to increase any MNEs’ tax liabilities currently incurred in their respective residence country to the global minimum tax vis-à-vis profits deemed shifted to low-tax jurisdictions.
The OECD stated that all G7 countries appear confident on the design of this new worldwide minimum income tax but not on the actual rate. The G7 countries are currently facing internal pressure for a consensus around the 15% rate.
Additionally, numerous items still remain under discussion notably on : whether investment funds and real estate investment trusts should be covered under the anticipated measures, the interaction of the global minimum tax rate with upcoming US tax reforms (i.e., The Made in America Tax Plan proposals) and the contemplated application date of the G7’s engagement.
Next steps
A G20 meeting is scheduled in Venice in the course of July 2021 to assess whether G7 can rely on broader support from the world's biggest developing and developed countries. More specifically, the G7 Communiqué included an expression of strong support for the ongoing work of the G20 through the OECD Inclusive Framework (i.e., BEPS Action Plan 15 on the introduction of the multilateral instrument), addressing the tax challenges of the digitalization of the economy. Still within the context of G20/OECD Inclusive Framework, the G7 Communiqué related its willingness to reach an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable MNEs.
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