After years of negotiations, 130 of the 139 countries participating in the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) reached an agreement on international corporate tax reform on Thursday 1 July after two days of meetings.
The final declaration, which is much more detailed than the agreement reached at the G7 in mid-June (see EUROPE 12740/12), was signed by all G20 countries, including the United States, France, Germany, China, India, Russia, and Turkey.
However, it could not convince everyone, including three EU Member States, namely Ireland, Hungary, and Estonia.
“I was not in a position to join the consensus on the agreement and specifically a global minimum effective tax rate of at least 15% today. I have expressed Ireland’s reservation, but remain committed to the process and aim to find an outcome that Ireland can yet support”, said Irish Finance Minister Paschal Donohoe.
Kenya, Nigeria, Peru, Sri Lanka, Barbados, and St Vincent and the Grenadines also did not sign the declaration.
For OECD Secretary-General Mathias Cormann, the package takes into account the interests of all parties to the negotiations, including those of small economies and developing countries. “It is in everyone’s interest that we reach a final agreement between all members of the Inclusive Framework by the end of the year, as planned”, he said in a statement.
“It is an ambitious, comprehensive, and innovative agreement. This is the most important international tax agreement in a century!”, said French Finance Minister Bruno Le Maire, promising to pursue his bilateral contacts to convince the last reluctant countries.
Pillar I and Pillar II components
Pillar I (reallocation of tax rights) will cover multinational companies with a global turnover of more than €20 billion and a profitability of more than 10%. Extractive industries and regulated financial services will be excluded from the scope.
A new special nexus rule will allow the A Amount to be assigned to a market jurisdiction if the covered multinational has at least €1 million in revenues in that jurisdiction. For small jurisdictions with a GDP of less than €40 billion, the threshold for triggering the nexus will be set at €250,000.
Where the residual profits of a covered company are already taxed in a market jurisdiction, a protective regime for profits from marketing and distribution activities will cap the residual profits attributed to the market jurisdiction. “Further work on the design of the safe harbour will be undertaken, including to take into account the comprehensive scope”, the text states.
The 130 countries also agreed on Pillar II of the reform, namely the establishment of a global minimum tax.
The rules will apply to multinationals with a turnover of at least €750 million. The minimum tax rate used will be “at least 15%” and is expected to generate, according to the OECD, about $150 billion in additional tax revenue per year worldwide.
The statement already provides for a "formulaic substance carve-out”, which will exclude an amount of income representing at least 5% of the carrying value of tangible assets and payroll.
The text also mentions an exclusion of income generated by international shipping activities and states that an exclusion of multinational enterprises from the scope of the global minimum tax, when they are in the initial phase of their international expansion, will also be “explored”.
EU digital levy in US crosshairs
Note that the statement refers to existing taxes on digital services that the US is keen to see removed.
“This package will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Service Taxes and other relevant similar measures on all companies”, it says.
During the two-day meeting, Washington is said to have crusaded against the digital levy proposal, which the European Commission is due to present on 14 July (see EUROPE 12637/16). According to a document consulted by AFP, the country has led a discreet diplomatic offensive with several European countries in order to delay this proposal, which, according to it, “could completely derail the negotiations at a delicate moment”.
EU Taxation Commissioner Paolo Gentiloni recently said that the European Commission would only present its proposal for a digital levy after the G20 Finance meeting in July, so as not to interfere with ongoing negotiations (see EUROPE 12745/11). The Commission has also recalled on numerous occasions that there is no conflict between the future global agreement and the EU’s digital levy (see EUROPE 12685/25).
Next steps
The agreement must now be endorsed by the G20 Finance Ministers at their meeting in Venice on 9-10 July. The remaining elements of the reform framework, including the implementation plan, will be finalised in October.
For Pillar I, the multilateral implementation instrument should be developed and opened for signature in 2022, before taking effect in 2023.
Pillar II is expected to be transposed into law in 2022, with a view to effective entry into force in 2023, possibly with transitional rules. It should be recalled that Pillar II will have the status of a “common approach”, meaning that the members of the Inclusive Framework will not be legally bound to adopt these rules.
See the statement: https://bit.ly/3xeWtT4
See the list of 130 signatory countries: https://bit.ly/3hsORp1 (Original version in French by Marion Fontana)