Finance ministers and central bank governors of the G7 countries (France, Germany, Italy, the United Kingdom, Canada, the United States and Japan) reached agreement on Thursday 18 July in Chantilly on the two pillars of international tax reform.
“We have reached an ambitious agreement”, French Finance Minister Bruno Le Maire told the press, noting that the G7 had opened in a “rather tense context” after last week's announcement of the opening of an investigation by the United States to determine whether the French ‘GAFA tax’ discriminates against US trade (see EUROPE 12294/10).
The OECD working agenda agreed by the G20 at the Osaka Summit in June (see EUROPE 12272/3), which is based on a two-pillar approach, provided many options and was not precise, said a French source, who considers that the G7 agreement will now allow concrete progress toward reform.
The summary of the results of the meetings, published by the French G7 presidency, confirms that the ministers have reached agreement in principle on the introduction of effective minimum corporate tax (see EUROPE 12298/7). “The level of taxation that will be set will depend on the specific details of the rules”, the text specifies, leaving the definition of a rate to a later date (see EUROPE 12296/20).
As for Pillar I, the ministers agreed on new territoriality rules (the ‘nexus’), which should be developed to take into account new economic models - such as those of companies with a strong digital component - and which would allow companies to operate in a territory without having a physical presence there.
The text specifies that new taxation rights could be determined by referring to criteria that reflect the company’s level of active participation in the State of a customer or user, such as high-value intangible assets or the use of a highly digitalised model.
However, the precise criteria for determining whether a company is “highly digitalised” have not yet been established, and it will be up to the OECD to do so.
Although difficulties persisted precisely on the taxation of “highly digitalised companies” on Wednesday evening, France said it was satisfied with the compromise.
“This is exactly what we expected and asked for”, Minister Bruno Le Maire assured the press. As a starting point for the discussions, France has agreed to take the American approach, which aims at a broader scope of application, in order to address the more significant consequences induced by the digital transformation of the economy. For its part, the United States has taken a step towards France by taking into account the specific character of companies with a strong digital component, he explained.
Ministers also agreed to increase tax predictability and limit aggressive tax optimization, in particular with regard to transfer pricing for distribution activities, a point that was reportedly requested by the United States, according to a source. They also agreed to have a mechanism for resolving disputes through binding arbitration between Member States.
Less optimism on the American side
Welcoming the progress made, US Treasury Secretary Steven Mnuchin was a little less optimistic than his French counterpart at a press conference.
According to him, the results of the discussions cannot be said to be a “breakthrough”, but they are in any case a “step in the right direction”. “We don’t have a solution at the OECD”, he noted, stressing that “there is still work” to be done.
In addition to defining an orientation for its work, the G7 has also defined a timetable. Ministers are asking the OECD to propose a comprehensive technical architecture for these rules by January 2020 at the level of the Inclusive Framework on BEPS, so that G20 members can take a decision by the end of 2020.
“The OECD now has all the technical and political tools at its disposal to make a concrete proposal”, concluded Bruno Le Maire. (Original version in French by Marion Fontana)