Why the G7’s global minimum tax call creates more risk for businesses

The G7’s call for a 15% minimum tax is ground-breaking but a long way from reality. Businesses should engage with broader global tax reforms.

In brief

• The G7 is nudging 139 countries to finish an OECD project to overhaul tax laws affecting cross-border businesses.
• Some pushback on a minimum tax 15% rate is likely, as the rate is higher than many countries would like. 

For the better part of four decades, countries competing for investment have provided global businesses with incentives and corporate tax rate reductions. That has meant a downward trajectory for corporate income taxes around the world. Now, G7 countries are trying to reverse the trend.

The communique from the just-concluded G7 Finance Ministers meeting in London expresses the body’s strong support for significant changes to the global tax rules on business income. A commitment to a minimum tax rate of at least 15% anchored the message. Also included were a significant reallocation of profits to market countries for the “largest and most profitable” companies, coupled with the removal of Digital Services Taxes for all companies when the new allocation rules take effect. 

The G7’s agreement is aimed at encouraging the 139 participating countries to reach agreement on a broader initiative by the G20. It also encourages the Organisation for Economic Cooperation and Development to make significant changes to tax laws affecting cross-border business. The goal is to get to consensus at the July G20 Finance Ministers meeting. If an agreement is reached by the members of the so-called Inclusive Framework, individual countries will have to incorporate the new rules in their own tax laws and tax treaties.

Even with further work to be done, the G7 agreement is a ground-breaking development, with the potential to drive change that will have significant and far-reaching impact. The changes proposed would require an unprecedented degree of coordination and cooperation among countries around the world, which creates substantial risk of greater uncertainty and complex tax controversy. There are also concerns that the new rules could result in higher global tax burdens, including double taxation.

The details will matter. It’s important that policymakers come together with stakeholders to work through the technical specifics of the changes. Country tax policymakers must clearly articulate the new rules and requirements so that global businesses can have clarity regarding their tax obligations. They also need to put mechanisms in place to mitigate the risk of double taxation. At the same time, government tax administrations must be enabled and equipped to implement the new rules on a coordinated basis.

While the G7 global minimum tax announcement garnered headlines, the ongoing negotiations continue to afford businesses an opportunity to model the possible impacts and make their voices heard as the parameters are worked out. There is still an opportunity to weigh in on the scope of the proposed profit reallocation rules, the other element of this initiative. Discussions are continuing on key aspects, including what types of businesses will be deemed the “largest and most profitable” and the extent to which industry-specific considerations will be reflected.

Businesses affected by Digital Services Taxes also will be focusing on how the removal of DSTs referenced in the G7 statement may be reflected in a final agreement reached by the Inclusive Framework.

For a number of years, our clients and EY have been monitoring developments in the G2/OECD project very closely, evaluating the implications of the proposals and participating in the global dialogue about these policy changes. The G7 endorsement will intensify that interest, and we’ll continue to engage constructively to help shape the details while preparing for any changes to come.

Global leaders need to work together to accomplish a tax system that raises the necessary revenue while also facilitating the trade and investment that fuels the global economy. This is an objective that should unite stakeholders, especially with the global economy still recovering from a pandemic. Let’s keep talking.

Reproduced with permission. Published June 29, 2021. Copyright ©  2021 The Bureau of National Affairs, Inc.