The Communiqué of the G7 Finance Ministers and Central Bank Governors, issued on 5 June (“the G7 Communiqué”), expresses strong support for the OECD/G20 Inclusive Framework efforts to achieve consensus on globally-coordinated reforms to address the tax challenges arising from globalisation and the digitalisation of the economy, and to adopt a global minimum taxation regime.
The G7 Communiqué signals a political consensus on several key issues related to the ongoing negotiations among the Group of Seven (which includes the United States, Canada, France, Germany, Italy, Japan, the United Kingdom and representatives of the EU) following two days of talks chaired by Chancellor Rishi Sunak in London.
With respect to Pillar One, the G7 Communiqué indicates agreement of the G7 to award taxing rights to market jurisdictions of at least 20 percent of profits exceeding a 10 percent margin for the largest and most profitable multinational enterprises. Further, the G7 Communiqué commits to provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes (“DSTs”), and other relevant similar measures, for all companies.
With respect to Pillar Two, the G7 Finance Ministers committed to a global minimum taxation rate of at least 15 percent determined on a country-by-country basis. Significantly, the G7 Finance Ministers also agreed on the importance of progressing both Pillars in parallel and reaching agreement at the July meeting of the G20 Finance Ministers and Central Bank Governors.
KPMG Observation: The consensus among the G7 evidenced in the Communiqué is a significant development that increases the likelihood that broader agreement can be reached at the G20 level and with the full OECD/G20 Inclusive Framework.
A number of open issues remain, however, including the scope of Pillar One, the level of commitment to tax certainty through an agreed dispute prevention and resolution structure, and the final agreement on the acceptable minimum rate for taxation.
The G7 Communiqué indicates significant progress in the G7 in determining the “quantum” of Pillar One, and specifically Amount A, but also leaves open a number of important questions relevant to scope. With respect to quantum, the agreement to allocate at least 20 percent of profits exceeding a 10 percent margin is consistent with illustrative assumptions and examples used in the OECD Pillar One Blueprint.
In terms of “scope”, the G7 Communiqué indicates that the new taxing right would apply for only the “largest and most profitable multinational enterprises”, but provides no further detail on how that would be determined. In particular, the G7 Communiqué is silent on the revenue threshold for inclusion, and on whether segmentation would be required in the determination of profit margin.
The G7 Communiqué also is silent with respect to whether certain industries or sectors will be excluded from the scope of Pillar One. In particular, the G7 Communiqué is silent on the scope of any financial services exclusion. Agreement on these open questions will be important to achieve politically acceptable results for several jurisdictions.
KPMG Observation: The G7 Communiqué provides for “appropriate” coordination between the application of the new taxing right and removal of all DSTs, and other “relevant similar measures,” on all companies.
The reference to “all” DSTs and “all” companies is significant, because it suggests that the G7 countries that have implemented DSTs, including the United Kingdom, France and Italy, may be prepared to eliminate such measures for all companies, even if the company is not within scope of the new taxing right provided by Pillar One. In fact, the UK Chancellor reaffirmed the UK’s commitment to repeal the UK DST, once a Pillar One solution is in place.
In addition, the reference to other relevant similar measures represents agreement that the commitment to remove unilateral measures is not limited to DSTs, though it remains to be seen which other measures will be deemed “relevant” – for example, could this include US measures, such as the Base Erosion and Anti-Abuse Tax (“BEAT”), the UK Diverted Profits Tax, and the Australian MAAL?
The G7 Communiqué, however, does not address the timing for the removal of such measures. For example, it has been reported that the US wants such measures to be removed at the time of an OECD/G20 agreement – i.e., prior to full implementation, such as after the G20 Finance Ministers and Central Bank Governors meeting in July – whereas other G7 countries may prefer to tie the rollback of unilateral measures to the time of implementation. The reference to “appropriate coordination” appears to leave room for negotiation as to timing and potentially scope of repeal of DSTs and other similar measures.
Agreement by the G7 on a rate of at least 15 percent under Pillar Two is a significant development and a departure from 12.5 percent, the most frequently cited rate by government officials over the last year and the rate used in the OECD’s Economic Impact Assessment.
The US Treasury Department had proposed a rate of at least 15 percent to the OECD/G20 Steering Group of the Inclusive Framework in late May 2021. Some countries which are not part of the G7 have expressed opposition to a 15 percent rate, so while agreement in the G7 makes a 15 percent rate more likely, there is no guarantee that such a rate ultimately will be agreed by the G20 or in the OECD/G20 Inclusive Framework.
It is also worth noting that the Communiqué specifically mentions a jurisdictional approach to applying the 15 percent minimum tax which would appear to stop “mixing” high and low taxed profits across jurisdictions (consistent with Biden plans for changes to GILTI) but would allow in-country mixing (e.g., as a result of certain income being subject to the UK Patent Box).
KPMG Observation: Consensus at the OECD on a global minimum taxation regime under Pillar Two would not compel jurisdictions to modify their corporate tax rates to be above the minimum. The proposal instead contemplates agreement on a set of coordinated measures designed to top-up the tax on cross-border income that falls below the agreed minimum tax. The top-up tax could be imposed by either the jurisdiction in which the parent company of an entity is located (through an income inclusion regime) or by a jurisdiction from which deductible payments are made (through an undertaxed-payments rule).
We expect the G7 Communiqué will help driving political approval of final proposals around Pillar One and Pillar Two of the BEPS project at the G20 Finance Ministers’ meeting next month, following which we could in theory be seeing these new rules coming into force as soon as 2023. In particular, the nature of the Pillar 2 proposals mean overall consensus would not prevent individual countries adopting them into domestic law. The UK has historically been an early adopter of OECD proposals, and so we would expect developments in the short term.
Given the lead-in time to implementation of these new rules is short, it is crucial for multinationals to assess the impact they could have now, and to begin working on complying with the new rules.