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In a 13 June communique, the leaders of the Group of Seven (G7)
endorsed the "
historic commitment" made by G7 finance ministers the week
prior towards 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 ministerial
communique targets the July G20 finance ministers and central bank
governors meeting to reach an agreement on the Pillars.
TheUnited States 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 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. 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.
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.
Although the G7 has targeted reaching an agreement at
the G20 finance ministers meeting in July, it is likely to roll
over to the October G20 Summit in Rome, where digital taxation will
also probably 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 corporate tax rates of 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.
The G7's proposed minimum global tax is likely to have
limited implications for Latin America given the region's high
levels of corporate taxation.
Except for offshore tax havens in the Caribbean and Paraguay
(10% tax rate), corporate taxation in the region is well above the
proposed 15% global tax. Also, such a minimum global tax will not
bring benefits through other channels; for example, the region is
not home to major multinationals that seek to exploit low taxation
jurisdictions, as is the case with the US and the European Union.
In principle, a fixed global tax would reduce the scope of tax
competition among countries seeking to attract foreign direct
investment; however, as the rate will be well below the average 27%
corporate tax in Latin America, the impact is likely to be
neutral.
Posted 28 June 2021 by Carlos Caicedo, Senior Principal Analyst, Latin America Country Risk, IHS Markit and
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