This article is written by Nicky Gouder, a co-founding partner of Seed, an internationally focused research-driven advisory firm based out of Malta, Europe
Last week, seven of the largest economies in world, known as the G7 countries, announced a ‘historic’ deal to stop global corporate tax avoidance. The deal has 2 main parts:
1. A minimum global tax rate of 15%; and
2. A re-allocation of taxing rights to market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin.
In order to understand the impact which this agreement could have, it is important that certain elements are taken into consideration:
Whilst this agreement is definitely ‘historic’ for a number of reasons, these countries now have the mammoth task of ensuring that this agreement is approved and implemented by all the other countries.
If a number of, particularly economically large countries, opt out of this agreement, this could create a catastrophe in terms of double taxation issues.
The US Government, which is the prime catalyst in this debate, will immediately face an uphill struggle in getting this Bill through Congress as a number of Republicans have clearly objected to this deal.
China will also play a major role in this debate and, to date, have not yet voiced their opinion on this global tax agreement.
What if a global agreement is reached?
If a global agreement is reached on both the minimum tax rate and the profit allocation, one needs to understand the detail of how this will be implemented. In the official G7 Communique, it is stated that the allocation of taxing rights to market countries will be applied to the ‘largest and most profitable multinational enterprises’. One needs to understand what the definition of ‘largest and most profitable enterprises’ will be, and whether there will be any industry-specific carve outs, as this is no longer aimed solely at digital companies.
In the same Communique, there is no mention of large or multinational enterprises in relation to the global minimum tax of 15%, but just that it will apply on a country-by-country basis. Having said that, a number of publications, including the G7 UK 2021 website communication, links multinational companies to the 15% minimum rate. It is therefore expected, that not only the profit allocation, but also the 15% rate would apply to the largest and most profitable enterprises.
This agreement is a result of global pressures on digital companies which do not require a physical presence in a jurisdiction to be able to provide their services. The result of this was the publication of the OECD Pillar I and Pillar II proposals as to how to tax digital companies – the discussion here revolved around companies with an annual turnover threshold of more than €750m. Whilst the new G7 deal is no longer aimed solely at tech companies, it is expected that a similar, or higher, turnover threshold will be maintained, and the impact will be on the larger multi-nationals.
As a result of the above-mentioned global pressures, a number of countries have already introduced a Digital Services Tax (‘DST’) in their domestic legislation to tax digital businesses. The G7 agreement states that it will provide appropriate coordination between the application of the new rules and the removal of all DSTs, as otherwise this too would result in major double tax issues and disputes.
This agreement could be the start of a major tax overhaul for the largest multi nationals, which could also have a large impact on tax revenues collected by certain jurisdictions. On the other hand, the impact on companies, which do not fall within the definition of ‘largest multi nationals’, could be minimum or non-existent.
The devil is in the detail.
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