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In a 5 June communique, G7 finance ministers announced concrete
actions committing to reaching an equitable solution on the
allocation of taxing rights. In addition to locating tax burdens
for the largest and most profitable multinationals in their
countries of operation rather than just where they are
headquartered (Pillar One), the member states also committed to a
global minimum corporate tax rate for multinationals of at least
15% (Pillar Two). The deal follows US Secretary of the Treasury
Janet Yellen's call for a minimum tax rate in April and comes ahead
of the 11-13 June G7 Leaders' Summit hosted by the UK. The
ministerial communique targets the July G20 finance ministers and
central bank governors meeting to reach an agreement on the
Pillars.
The US to push for a new global tax regime.
Despite maintaining US threats of new tariffs if European
countries pursue unilateral digital service taxes, the US
administration of President Joe Biden has signaled that it will
continue to push for a new global tax regime, both to access an
estimated USD533-billion revenue stream and as another opportunity
to bolster US relations with major European allies, such as France
and Germany. It has already agreed to discuss removing existing US
tariffs on aluminum and steel and postponed imposing substantial
sanctions on the construction of the Nord Stream 2 pipeline. With
such moves, the administration hopes to encourage EU states to
support other US foreign policy priorities, such as adopting
tougher diplomatic stances towards China and Russia. Furthermore,
it wishes to demonstrate to US allies that the US has recommitted
to taking a leadership role in setting international standards and
that it is also amenable to offering compromises to resolve
existing international disputes. Although the administration is
likely to join a newly negotiated international tax pact, getting
US congressional ratification for its implementation will be
challenging, especially in the event that congressional lawyers
deem the new agreement a treaty, which would necessitate a
two-thirds majority. Democrats currently hold minimal House and
Senate majorities, and Republicans are likely to be united in their
reluctance to give President Biden a diplomatic victory.
Full EU buy-in for the G7 plan to face internal
obstacles.
Internal EU disputes on corporate tax issues remain unresolved
by a new European Commission corporate tax plan published in May,
or by member states' needs to find additional revenues to cover
raised state spending and accelerate economic recovery. The four G7
members in Europe already levy corporate tax at well above 15%:
France (28%), Germany (29%), Italy (27%), and the United Kingdom
(19%; which also intends to raise that to 25% from 2023). However,
there are clear asymmetries among EU member states. While corporate
tax rates range as high as 31.5% in Portugal, Ireland currently
taxes corporate profits at 12.5%, and Hungary at only 9.0%. Ireland
has used its low corporate tax regime as a key incentive to
encourage firms to locate there. The risk of losing attractiveness
as an investment destination implies that Ireland and Hungary are
unlikely to support the G7 initiative in its current format. Since
the European Union needs a unanimous rather than a qualified
majority to pass new tax legislation, achieving the necessary EU
unanimity is unlikely unless a compromise can be found.
G7 statement is likely to avoid detailed
pledges.
The most likely outcome from the G7 Leaders' Summit is an agreed
communique that restates the finance ministers' commitments on
general principles but does not identify specific actions for
countries - notably those currently likely to oppose the global
standard. Should such a communique explicitly or implicitly link
the G7 proposal to Pillar Two of the ongoing OECD/G20 Inclusive
Framework that includes a global minimum corporate tax rate of
12.5%, this should create further momentum for the OECD proposal.
Meanwhile, G7 members are likely to announce an agreement on broad
principles, rolling the process onto the G20 finance ministers
meeting in July, and thereafter to the October G20 Summit in Rome,
where digital taxation is likely to be high on the agenda. That
latter meeting is likely to be crucial to recruiting countries from
outside of the "global north" and smaller non-G7 economies to
support global arrangements for the taxation of multinationals. The
support of some of those countries will be critical to any
possibility of positively influencing Russia and China, which have
given their own corporate tax rates at 20% and 25%, respectively,
and which will probably view the standard-setting initiative in
geopolitical terms as an attempt to push back against their
influence globally.
Posted 10 June 2021 by John Raines, Principal Global Risks Adviser and Head of North America, Economics & Country Risk, S&P Global Market Intelligence and
Laurence Allan, Ph.D., Director and Head of Desk for Country Risk Europe & CIS, IHS Markit and