This weekend the G7 finance ministers announced an agreed position on significant reforms to global taxation.
The agreement, which Chancellor Rishi Sunak called "truly historic, builds on the two "pillar" approach being developed by the OECD to address the tax challenges of digitalisation.
- "Pillar One" seeks to introduce a new taxing right for countries in relation to non-resident companies that do not have a local permanent establishment.
- "Pillar Two" seeks to introduce a global minimum corporate tax rate.
The OECD had hoped to reach a consensus solution on both pillars last year but that was not possible. One reason for this was the US's opposition, under the Trump administration, to Pillar One in the proposed form. The Biden administration has taken a different approach, leading to today's agreement.
Pillar One
Under the G7's agreement on Pillar One, local jurisdictions will be "awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises".
Although little detail has been given in relation to the G7 agreement, it appears that the position on Pillar One differs from the OECD proposal, reflecting US concerns. In particular, it seems (although is not expressly stated in the G7's communiqué) that the new taxing right will not be limited to consumer facing businesses and those providing automated digital services but, instead, will apply to all industries.
It is understood that the US had also wanted higher size criteria than appeared to be favoured by the OECD, such that Pillar One would only apply to no more than 100 multi-national enterprises. However, it is unclear exactly what has been decided here, with (as set out above) the G7 agreement just stating that the new taxing right will apply to the "largest and most profitable multinational enterprises." This is an important point and it is hoped that clarification is forthcoming sooner rather than later.
