Global corporation tax reform: what are the key issues in G7 negotiations?

Here are the details behind the talks over Joe Biden’s proposals for a minimum corporate tax rate

G7 finance ministers are expected to agree on support for a global minimum corporation tax rate on Friday as part of talks being held in London between the group of wealthy nations.

The potential landmark tax reform comes as governments around the world grapple with record levels of public borrowing incurred during the coronavirus pandemic.

On Wednesday, the US focused minds by threatening to impose punitive tariffs on exports from the UK and five other countries in retaliation for digital services taxes recently imposed on US corporates. The Biden proposals are intended to replace these unilateral moves by creating international agreements that capture the vast profits made by the likes of Apple and Microsoft in Europe and elsewhere.

Any deal would follow years of false starts in attempts to ensure that multinationals and the giant tech companies pay their fair share of taxes. The reforms would limit how big companies can shift profits to low-tax jurisdictions. Here are the details behind the G7 negotiations.

What’s on the table right now?

Negotiations to reform the global tax system have been under way since the aftermath of the 2008 financial crisis, with the latest talks taking place between 135 countries at the Organisation for Economic Cooperation and Development (OECD) in Paris. There are hopes that support from the G7 will spur wider backing at a meeting of G20 finance ministers in Italy next month. The aim is to strike an agreement by October.

There are two main pillars of the blueprint being negotiated.

Under pillar one, countries would get a new right of taxation over a share of profits generated in their jurisdiction by an overseas-headquartered multinational. This would mean taxing the source of a company’s revenue, such as sales of shoes or digital services, regardless of the firm’s physical location.

Under pillar two, a minimum corporation tax rate would be imposed by countries on the overseas profits of large companies headquartered in their jurisdiction. The minimum rate would only apply to multinationals with revenues above a certain threshold – the specifics of which will be central to the talks. The tax would be paid to the country where the parent company of the multinational is based.

The US president, Joe Biden, has proposed a minimum rate of 21%, but Washington has since dropped this recommendation to 15% to win support for the reforms from other countries.

Which companies would it apply to?

The Biden administration has proposed that about 100 multinationals would be within the scope of pillar one. It has not published a list of these firms, or the thresholds that would need to be applied to bring them into scope, but tax experts believe about half of those affected would be US companies, including about eight digital firms.

The Washington plans are likely to replace OECD proposals put forward last year, which included a €750m (£647m) revenue threshold, with criteria to narrow the focus to “automated digital services” and “consumer-facing businesses”, with a profit margin threshold of 10%. This would have captured about 2,300 multinationals.

The US had previously balked at measures targeting digital firms, which are largely based on its shores. The Biden plan would not include specific tests for online activity, and would apply to all firms except banks and natural resources firms, according to tax experts.

The plans for a minimum global corporation tax rate, under pillar two, would capture up to 8,000 multinationals.

Analysis by the EU Tax Observatory indicates companies that would be forced to pay more tax would include the oil giants BP, Shell, Iberdrola and Repsol, the mining firm Anglo American, telecoms firm BT, and banks such as HSBC, Barclays and Santander.

How much would it raise?

The OECD estimated last October that as much as $81bn (£57bn) in additional tax revenues each year would be raised under the reforms. Pillar one would bring in between $5bn and $12bn, while pillar two, the global minimum rate, would collect between $42bn and $70bn.

However, this assumed that a global minimum rate of 12.5% would be applied under pillar two. It also captures a larger number of multinationals under pillar one. The Tax Justice Network advocacy group estimates that a 21% minimum rate would bring in $640bn in underpaid tax.

There are various estimates for how much individual countries would recover. According to the Institute for Public Policy Research thinktank’s Centre for Economic Justice, the UK would reap an extra £14.7bn annually from a 21% global minimum rate.

Ireland could lose up to €2bn per year, according to its finance minister, Paschal Donohoe. The country, which levies corporation tax at 12.5% and has lower rates for profits on patents, demanded €11.8bn in corporate tax last year.

Could it be avoided?

Tax experts believe avoidance would be difficult, especially if the changes are backed by a broad group of the world’s biggest economies. With very few firms likely to fall into pillar one, the system would be easier to administer – but it may therefore not be as transformative.

Under pillar two, each country would collect the underpaid taxes of its own multinationals. For example, if a UK firm has operations in Singapore, if taxes were lower there than the minimum rate, it would impose an additional tax on those profits to reach the minimum rate.

If a company moved its headquarters to a low-tax jurisdiction, the rules would allow a country to apply the minimum rate to the firm’s operations within its borders if its new parent country did not apply the minimum rate.

What are the sticking points?

The scope of the new rules to decide which companies are included, and the thresholds to determine what portion of profits are taxable, are key points of negotiation.

Talks will continue on where the minimum rate should be set. Some medium-sized economies have corporate tax rates below the minimum proposed by Washington – such as Ireland at 12.5% and Hungary at 9%. However, tax experts believe a deal could still be struck because 15% is not a big hike.

There are concerns in the UK about the limited scope for pillar one. Ministers want US tech giants to pay a fair share of taxes based on the revenues they generate in Britain.

The UK and several other EU nations have introduced unilateral digital services taxes to address this issue. The US wants them dropped if a multilateral agreement is reached. However, there could be years of implementation for the new global rules, meaning that the removal of digital services taxes in some countries would be far from certain.

The plan for a minimum rate in the US would also need to pass through Congress, which is split 50-50 between Republicans and Democrats, making it harder for the Biden administration. However, tax experts believe some form of minimum will be agreed.

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