Readers will have seen the headlines dominating the early June news around the ‘historic deal’ reached in London by the finance ministers of the G7 (a group of seven of the world’s wealthiest economies). The deal reached has been described as a ‘seismic’ contribution to efforts to update the international tax system, especially with respect to ensuring that so-called ‘tech’ companies pay their fair share. But is the fanfare that accompanied this development justified by its substance? In particular, what will a ‘global minimum tax’ of 15% mean in practice and how close are we to collecting such a tax?
Here we ask several key questions around the latest announcements and consider what they are likely to mean in the ongoing international project to modernise the global tax system.
The attention has been focused on the outcome of the aforementioned G7 meeting over the first weekend of June 2021. The meeting resulted in the publication of a communique setting out the member countries’ agreed consensus on a variety of topics. Despite its centrality in the resulting headlines, the proposals around tax only take up one paragraph out of 20.
Under the heading of ‘Shaping a safe and prosperous future for all’, the wording representing the ‘landmark’ tax deal amounts to 150 carefully chosen words. The content can be summarised as confirming support for the work of the OECD Inclusive Framework (on addressing the tax challenges arising from globalisation and digitalisation), and a commitment by the G7 countries to:
Despite the focus on the global minimum tax in the recent reporting, it is clear from the above that the published consensus between the G7 sits along the same lines as the OECD’s project:
In a possible concession towards the US’s preferred model, it is notable that the G7 communique is silent on the stated target of the reallocation of taxing rights, nor does it focus on ‘automated digital services’ (or ‘consumer-facing businesses’ for that matter) when compared with the initial target of the OECD’s work. On one reading, the corresponding repeal of domestic DSTs may suggest that the measures still have tech companies in their cross-hairs; but if the proposals go through without a digital focus, that would represent a ‘double victory’ for the US, as such companies would escape the full force of not one but two measures originally implemented to target them.
While the amount of commentary is arguably out of proportion to the content of the text, its significance and the emerging reactions derive from the broader discussions that have been going on in this area.
Many speculate that this agreement would have been much less likely – or even possible – even a year ago. The fact that even this high-level consensus has been reached is therefore notable, and it is the likely result of two significant factors: the political impetus driven by the financial need to rebuild public finances following pandemic expenditure; and a new, more outward-facing US administration.
The significance is therefore better classed as political, rather than material in the broader work towards mapping out what the new international tax rules will look like in practice. On that front, the development is a necessary but not sufficient development in the progress towards an overall deal. Crucially, we are still a long way off actually collecting any tax under the proposed measures let alone seeing the full detail of the rules, but there is certainly some added momentum now.
The reporting of the minimum corporation tax is often misleading, implying that 15% is the rate that countries will be obliged to apply as their nominal domestic corporation tax rate. This is not the case. Rather, the agreement would mean that the signatory countries agree to ensure that multinationals headquartered in their jurisdictions have paid this rate of tax across their foreign controlled subsidiaries.
The minimum tax would therefore apply at the headquarter level if the parent company is located in a signatory jurisdiction, by comparing the ETR of profits from each subsidiary jurisdiction to the agreed minimum tax rate in question (‘at least 15%’) on a country by country basis. Where this requirement has not been met, the headquarter jurisdiction would top up the tax to the level of the minimum tax rate.
This is aimed at removing any advantage that groups have enjoyed by establishing subsidiaries in low tax jurisdictions; the incentive for a group to do so is theoretically cancelled out by the corresponding obligation to top up tax at the level of the ultimate parent company. This measure combats the incentive for countries to reduce their headline rate: the so-called ‘race to the bottom’.
Where the parent company is not located in a jurisdiction that has signed up to the global minimum tax, other mechanisms may be needed to collect a minimum amount of tax. The OECD has put forward two proposals, the ‘undertaxed payment rule’ and the ‘subject to tax rule’, but neither are perfect as they require domestic legislative changes or bilateral treaty amendments. This means that – if these proposals are to be the end of tax havens – a lot of signatories will be needed for it to be fully effective.
The communique tells us that the global minimum tax will (as above) operate on a ‘country by country basis’, rather than an approach based on ‘blending’ which has featured in previous OECD discussions (and is allowed under the US GILTI regime). It appears that any appetite has diminished for a blended approach, which would allow a group to take its presence in high tax jurisdictions into account in calculating its ETR (thereby effectively ‘offsetting’ its presence in low tax jurisdictions).
A large part of the forthcoming negotiations will focus on how to calculate the ETR. It will be necessary not only to determine how profit can be defined (and under which accounting standards), but also to reach agreement on what tax adjustments are needed to arrive at the profit chargeable to tax. For the purposes of the ETR calculation, a global standard tax base will need to be devised to determine the accepted tax adjustments ranging from capital allowances to participation exemptions. The OECD has started its work in this field, but negotiations will remain political as well as technical given this measure erodes some of the sovereignty a country has over its tax base.
The communique also commits to ‘reaching an equitable solution on the allocation of taxing rights’ to market jurisdictions. This refers to the introduction of a new nexus rule to provide relevant countries (i.e. those in whose markets non-resident companies participate through their engagement with consumers and users) with the right to at least 20% of profit exceeding a 10% profit margin. The agreement states that only the ‘largest and most profitable multinational enterprises’ will be caught. This suggests that the measure is developing in line with the US Treasury’s proposals, which would see only the world’s largest 100 companies – which also have a profit margin in excess of 10% – within scope. The original proposal was, as discussed below, sector-based and for global groups with consolidated revenue in excess of €750m, which was likely to have caught around 2,300 multinational enterprises. Time (and negotiations) will tell how large the pool of in-scope companies becomes.
This approach is vastly simplified from the original pillar one proposals that sought to identify automated digital services and consumer-facing businesses. However, what it makes up for in pragmatism, it loses in precision – namely, in identifying its target. Questions are already being asked about its effectiveness which may lead to added complexity to engineer certain companies into the rules. This could take the form of ‘streaming’, meaning that the profit margin of certain business lines is calculated separately to test whether they are in scope.
There is much to be ironed out in the development of this proposal. The communique is silent on how to actually determine either the relevant ‘profit’ for the purposes of the profit margin test, or the portion of super-profit allocated. In common with the minimum tax, a global standardised definition will need to be adopted. The numerous pages devoted to this in the OECD blueprints highlight the difficulties faced in reaching a consensus.
Another critical area will be determining the mechanism to identify a market jurisdiction. To limit the long arms of this proposal, a threshold may be necessary to determine which market jurisdictions have active and sustained engagement with consumers/users. The original proposals suggested a revenue threshold but also explored making the link to the physical presence of personnel closely linked to sales, advertising or promotion in a jurisdiction.
As already mentioned, the OECD proposals targeted just two types of business: automated digital services and consumer-facing businesses. With the publication of the G7 deal, there appears to have been a departure from this sectoral focus, raising new questions about the status of sector-based exclusions set out in the OECD blueprint. For instance, the blueprint set out principled reasons why it would not be appropriate to capture certain parts of the financial services sector, but it remains to be seen if those reasons withstand the ongoing negotiations.
The development has been welcomed by a broad spectrum of UK stakeholders. Chancellor Rishi Sunak described the deal as creating ‘a fairer tax system fit for the 21st century’.
However, not everyone thinks the deal is so momentous. Some argue the rate agreed is not high enough, pointing out that it does not represent a sufficient departure from that currently charged by jurisdictions such as Ireland. Labour Party leader Keir Starmer has suggested that the Conservative government was responsible for ‘watering down’ the initial plan by negotiating the rate down to 15% from 21%. The Tax Justice Network has called the rate ‘far too low’ and accused the G7 of reaching a deal that will only benefit its member countries, ‘leaving the rest of the world behind’.
The minimum tax rate proposals would mean that the principal tax take is at the headquarter jurisdiction level. Therefore, the treasuries of jurisdictions where many large multinationals are headquartered will benefit most in terms of increased revenue. This includes (but is not limited to) the US, where many of the giant ‘tech’ companies are headquartered.
The multinational groups which are headquartered in these jurisdictions may feel rather removed from this victory since they will be the ones giving up more of their profits in tax. Anti-inversion rules in the US, along with widespread adoption of the global minimum rate, may prevent a material exodus, although an incentive to invert may nonetheless remain.
Jurisdictions in which multinational enterprises are not typically headquartered are unlikely to see any increase in their tax revenue in the short term. That is unless, of course, they choose to unilaterally increase their domestic tax rates, which is arguably the secondary result that the proposals aim to achieve (i.e. the effective eradication of ‘tax havens’, which in this context are those jurisdictions imposing very low or no corporation tax rates). This may also apply to countries which although they have a fairly typical nominal rate of corporate tax, may in practice allow funds to travel through them subject to low or no taxation (for example, Luxembourg). The resolution of this will depend on the detailed workings of the minimum tax in areas such as distributions.
Many of the countries which are less happy with the new proposals around the minimum tax rate are non-headquartered jurisdictions where a low corporation tax rate has historically been a critical part of their national business model. The proposals effectively remove one of their ‘unique selling points’ when it comes to attracting foreign investment. For many of these countries, it is likely that any amounts recovered by increasing their own domestic rates would fall short of replacing the revenue lost through the exodus of multinationals that no longer gain a tax advantage by having a subsidiary there. The Biden administration sees measures of this sort as putting tax havens ‘out of business’, although a more forward-looking reading of this might be that such jurisdictions should change and adapt their business model to something that does not involve a ‘race to the bottom’.
This combination of the additional fund flows to ‘richer nations’ with the hit to the economies of developing countries is a source of criticism.
Compared to the minimum tax rate above, it is likely that a larger number of countries will experience an increase in their tax take under the heading of the so-called ‘equitable reallocation of taxing rights’ to countries in which companies’ customers and/or users are located (although what one country wins, another country loses). The aim of this limb is not only to make sure not just that the right amount of tax is paid overall, but also that tax is also paid in the ‘right places’, i.e. where companies ‘do business’. It has been critical for countries that do not stand to benefit from pillar two to obtain commitment on pillar one.
Although it hasn’t made as many headlines as the minimum tax rate, the consensus on parameters for which companies will be subject to this reallocation of tax – and what proportion of their profits will be impacted – is arguably as important. On the basis of the G7 communique, only companies making profit of at least 10% (i.e. with a profit margin of this amount) will be subject to the reallocation rules; and only 20% of profit above this 10% margin would then be available for redistribution.
Some say this doesn’t go far enough. Given that this 20% of profit exceeding the 10% profit margin will then need to be reallocated between (likely) multiple jurisdictions, it could be said that many countries will be getting a much smaller ‘slice of the pie’ than they were expecting. Anyone who thought these proposals might simplify the tax system and reduce tax disputes is mistaken, given the potential for double counting. The tax certainty measures associated with the original blueprint will be an important component of the final agreement.
Some criticism also stems from the fact that this structure will ostensibly fail to capture companies that were at the centre of the original policy proposals, such as Amazon, which have very high revenues but historically have had no or low profit margins. There is a risk that the failure to capture these central targets may undermine the proposals.
Central to a jurisdiction’s tax sovereignty is not just what a jurisdiction chooses to tax but what it chooses not to tax (or to tax less). In this vein, many jurisdictions offer tax incentives to encourage certain types of activity. The UK’s range of tax incentives includes, for instance, the patent box regime (which reduces the corporation tax rate to 10% on the profits attributable to certain R&D activities), and the announcement in the 2021 Budget of eight new freeports which create economic zones offering certain temporary tax breaks to companies.
There is nothing in the new proposals that affects a country’s prerogative to offer these regimes, and the benefits received by companies operating in the relevant jurisdiction only (for instance, a domestic UK group or indeed a global group operating below the threshold) will remain the same. However, one effect of a minimum effective tax rate is that where companies operating in jurisdictions which offer these tax incentives are part of a larger multinational group, there will be circumstances in which the benefits offered by such tax incentive regimes in particular jurisdictions will be neutralised by the obligation of the ultimate parent company to levy additional tax to make up for it.
It will be interesting to see whether and to what extent countries’ response to the proposals (either now or if and when legislated) involve a review of their domestic tax incentives as well as their domestic tax rates.
The short answer is: a lot more work. In many ways, settling on headline numbers may not be as significant as it first appears for as long as the mechanisms and formulae into which those numbers are ultimately going to be inserted are not yet finalised (and have a long way to go to become so).
There are also other crucial parts of the calculation (which could have just as large an effect on the ultimate scale, nature and distribution of taxing rights) which this communique did not touch on – the way in which the tax base will be determined being a prime example in both of the proposals.
In addition, one could argue that it is misleading to interpret the communique as actually having settled anything at all. Even the headline numbers of the minimum tax rate and the proportion of profits to be reallocated are described with the prefix ‘at least’, indicating that they are subject to move (if only upwards), so there is room for further change there.
The extent and manner to which economies whose ‘business model’ will be primarily hit by this (such as Ireland) will be supported through the period of transition remains to be seen too. As stated above, it will be important to monitor how the tax systems of these territories evolve.
In terms of process, these proposals now need to be put to the G20 in July, where they will be considered by a broader range of countries including China and India. For consensus on a basis sufficiently wide for the proposals to be effective on a global scale, they will then need to be put to the 139 members of the Inclusive Framework, which may well have differing opinions on their adequacy and efficacy.
Readers will have seen the headlines dominating the early June news around the ‘historic deal’ reached in London by the finance ministers of the G7 (a group of seven of the world’s wealthiest economies). The deal reached has been described as a ‘seismic’ contribution to efforts to update the international tax system, especially with respect to ensuring that so-called ‘tech’ companies pay their fair share. But is the fanfare that accompanied this development justified by its substance? In particular, what will a ‘global minimum tax’ of 15% mean in practice and how close are we to collecting such a tax?
Here we ask several key questions around the latest announcements and consider what they are likely to mean in the ongoing international project to modernise the global tax system.
The attention has been focused on the outcome of the aforementioned G7 meeting over the first weekend of June 2021. The meeting resulted in the publication of a communique setting out the member countries’ agreed consensus on a variety of topics. Despite its centrality in the resulting headlines, the proposals around tax only take up one paragraph out of 20.
Under the heading of ‘Shaping a safe and prosperous future for all’, the wording representing the ‘landmark’ tax deal amounts to 150 carefully chosen words. The content can be summarised as confirming support for the work of the OECD Inclusive Framework (on addressing the tax challenges arising from globalisation and digitalisation), and a commitment by the G7 countries to:
Despite the focus on the global minimum tax in the recent reporting, it is clear from the above that the published consensus between the G7 sits along the same lines as the OECD’s project:
In a possible concession towards the US’s preferred model, it is notable that the G7 communique is silent on the stated target of the reallocation of taxing rights, nor does it focus on ‘automated digital services’ (or ‘consumer-facing businesses’ for that matter) when compared with the initial target of the OECD’s work. On one reading, the corresponding repeal of domestic DSTs may suggest that the measures still have tech companies in their cross-hairs; but if the proposals go through without a digital focus, that would represent a ‘double victory’ for the US, as such companies would escape the full force of not one but two measures originally implemented to target them.
While the amount of commentary is arguably out of proportion to the content of the text, its significance and the emerging reactions derive from the broader discussions that have been going on in this area.
Many speculate that this agreement would have been much less likely – or even possible – even a year ago. The fact that even this high-level consensus has been reached is therefore notable, and it is the likely result of two significant factors: the political impetus driven by the financial need to rebuild public finances following pandemic expenditure; and a new, more outward-facing US administration.
The significance is therefore better classed as political, rather than material in the broader work towards mapping out what the new international tax rules will look like in practice. On that front, the development is a necessary but not sufficient development in the progress towards an overall deal. Crucially, we are still a long way off actually collecting any tax under the proposed measures let alone seeing the full detail of the rules, but there is certainly some added momentum now.
The reporting of the minimum corporation tax is often misleading, implying that 15% is the rate that countries will be obliged to apply as their nominal domestic corporation tax rate. This is not the case. Rather, the agreement would mean that the signatory countries agree to ensure that multinationals headquartered in their jurisdictions have paid this rate of tax across their foreign controlled subsidiaries.
The minimum tax would therefore apply at the headquarter level if the parent company is located in a signatory jurisdiction, by comparing the ETR of profits from each subsidiary jurisdiction to the agreed minimum tax rate in question (‘at least 15%’) on a country by country basis. Where this requirement has not been met, the headquarter jurisdiction would top up the tax to the level of the minimum tax rate.
This is aimed at removing any advantage that groups have enjoyed by establishing subsidiaries in low tax jurisdictions; the incentive for a group to do so is theoretically cancelled out by the corresponding obligation to top up tax at the level of the ultimate parent company. This measure combats the incentive for countries to reduce their headline rate: the so-called ‘race to the bottom’.
Where the parent company is not located in a jurisdiction that has signed up to the global minimum tax, other mechanisms may be needed to collect a minimum amount of tax. The OECD has put forward two proposals, the ‘undertaxed payment rule’ and the ‘subject to tax rule’, but neither are perfect as they require domestic legislative changes or bilateral treaty amendments. This means that – if these proposals are to be the end of tax havens – a lot of signatories will be needed for it to be fully effective.
The communique tells us that the global minimum tax will (as above) operate on a ‘country by country basis’, rather than an approach based on ‘blending’ which has featured in previous OECD discussions (and is allowed under the US GILTI regime). It appears that any appetite has diminished for a blended approach, which would allow a group to take its presence in high tax jurisdictions into account in calculating its ETR (thereby effectively ‘offsetting’ its presence in low tax jurisdictions).
A large part of the forthcoming negotiations will focus on how to calculate the ETR. It will be necessary not only to determine how profit can be defined (and under which accounting standards), but also to reach agreement on what tax adjustments are needed to arrive at the profit chargeable to tax. For the purposes of the ETR calculation, a global standard tax base will need to be devised to determine the accepted tax adjustments ranging from capital allowances to participation exemptions. The OECD has started its work in this field, but negotiations will remain political as well as technical given this measure erodes some of the sovereignty a country has over its tax base.
The communique also commits to ‘reaching an equitable solution on the allocation of taxing rights’ to market jurisdictions. This refers to the introduction of a new nexus rule to provide relevant countries (i.e. those in whose markets non-resident companies participate through their engagement with consumers and users) with the right to at least 20% of profit exceeding a 10% profit margin. The agreement states that only the ‘largest and most profitable multinational enterprises’ will be caught. This suggests that the measure is developing in line with the US Treasury’s proposals, which would see only the world’s largest 100 companies – which also have a profit margin in excess of 10% – within scope. The original proposal was, as discussed below, sector-based and for global groups with consolidated revenue in excess of €750m, which was likely to have caught around 2,300 multinational enterprises. Time (and negotiations) will tell how large the pool of in-scope companies becomes.
This approach is vastly simplified from the original pillar one proposals that sought to identify automated digital services and consumer-facing businesses. However, what it makes up for in pragmatism, it loses in precision – namely, in identifying its target. Questions are already being asked about its effectiveness which may lead to added complexity to engineer certain companies into the rules. This could take the form of ‘streaming’, meaning that the profit margin of certain business lines is calculated separately to test whether they are in scope.
There is much to be ironed out in the development of this proposal. The communique is silent on how to actually determine either the relevant ‘profit’ for the purposes of the profit margin test, or the portion of super-profit allocated. In common with the minimum tax, a global standardised definition will need to be adopted. The numerous pages devoted to this in the OECD blueprints highlight the difficulties faced in reaching a consensus.
Another critical area will be determining the mechanism to identify a market jurisdiction. To limit the long arms of this proposal, a threshold may be necessary to determine which market jurisdictions have active and sustained engagement with consumers/users. The original proposals suggested a revenue threshold but also explored making the link to the physical presence of personnel closely linked to sales, advertising or promotion in a jurisdiction.
As already mentioned, the OECD proposals targeted just two types of business: automated digital services and consumer-facing businesses. With the publication of the G7 deal, there appears to have been a departure from this sectoral focus, raising new questions about the status of sector-based exclusions set out in the OECD blueprint. For instance, the blueprint set out principled reasons why it would not be appropriate to capture certain parts of the financial services sector, but it remains to be seen if those reasons withstand the ongoing negotiations.
The development has been welcomed by a broad spectrum of UK stakeholders. Chancellor Rishi Sunak described the deal as creating ‘a fairer tax system fit for the 21st century’.
However, not everyone thinks the deal is so momentous. Some argue the rate agreed is not high enough, pointing out that it does not represent a sufficient departure from that currently charged by jurisdictions such as Ireland. Labour Party leader Keir Starmer has suggested that the Conservative government was responsible for ‘watering down’ the initial plan by negotiating the rate down to 15% from 21%. The Tax Justice Network has called the rate ‘far too low’ and accused the G7 of reaching a deal that will only benefit its member countries, ‘leaving the rest of the world behind’.
The minimum tax rate proposals would mean that the principal tax take is at the headquarter jurisdiction level. Therefore, the treasuries of jurisdictions where many large multinationals are headquartered will benefit most in terms of increased revenue. This includes (but is not limited to) the US, where many of the giant ‘tech’ companies are headquartered.
The multinational groups which are headquartered in these jurisdictions may feel rather removed from this victory since they will be the ones giving up more of their profits in tax. Anti-inversion rules in the US, along with widespread adoption of the global minimum rate, may prevent a material exodus, although an incentive to invert may nonetheless remain.
Jurisdictions in which multinational enterprises are not typically headquartered are unlikely to see any increase in their tax revenue in the short term. That is unless, of course, they choose to unilaterally increase their domestic tax rates, which is arguably the secondary result that the proposals aim to achieve (i.e. the effective eradication of ‘tax havens’, which in this context are those jurisdictions imposing very low or no corporation tax rates). This may also apply to countries which although they have a fairly typical nominal rate of corporate tax, may in practice allow funds to travel through them subject to low or no taxation (for example, Luxembourg). The resolution of this will depend on the detailed workings of the minimum tax in areas such as distributions.
Many of the countries which are less happy with the new proposals around the minimum tax rate are non-headquartered jurisdictions where a low corporation tax rate has historically been a critical part of their national business model. The proposals effectively remove one of their ‘unique selling points’ when it comes to attracting foreign investment. For many of these countries, it is likely that any amounts recovered by increasing their own domestic rates would fall short of replacing the revenue lost through the exodus of multinationals that no longer gain a tax advantage by having a subsidiary there. The Biden administration sees measures of this sort as putting tax havens ‘out of business’, although a more forward-looking reading of this might be that such jurisdictions should change and adapt their business model to something that does not involve a ‘race to the bottom’.
This combination of the additional fund flows to ‘richer nations’ with the hit to the economies of developing countries is a source of criticism.
Compared to the minimum tax rate above, it is likely that a larger number of countries will experience an increase in their tax take under the heading of the so-called ‘equitable reallocation of taxing rights’ to countries in which companies’ customers and/or users are located (although what one country wins, another country loses). The aim of this limb is not only to make sure not just that the right amount of tax is paid overall, but also that tax is also paid in the ‘right places’, i.e. where companies ‘do business’. It has been critical for countries that do not stand to benefit from pillar two to obtain commitment on pillar one.
Although it hasn’t made as many headlines as the minimum tax rate, the consensus on parameters for which companies will be subject to this reallocation of tax – and what proportion of their profits will be impacted – is arguably as important. On the basis of the G7 communique, only companies making profit of at least 10% (i.e. with a profit margin of this amount) will be subject to the reallocation rules; and only 20% of profit above this 10% margin would then be available for redistribution.
Some say this doesn’t go far enough. Given that this 20% of profit exceeding the 10% profit margin will then need to be reallocated between (likely) multiple jurisdictions, it could be said that many countries will be getting a much smaller ‘slice of the pie’ than they were expecting. Anyone who thought these proposals might simplify the tax system and reduce tax disputes is mistaken, given the potential for double counting. The tax certainty measures associated with the original blueprint will be an important component of the final agreement.
Some criticism also stems from the fact that this structure will ostensibly fail to capture companies that were at the centre of the original policy proposals, such as Amazon, which have very high revenues but historically have had no or low profit margins. There is a risk that the failure to capture these central targets may undermine the proposals.
Central to a jurisdiction’s tax sovereignty is not just what a jurisdiction chooses to tax but what it chooses not to tax (or to tax less). In this vein, many jurisdictions offer tax incentives to encourage certain types of activity. The UK’s range of tax incentives includes, for instance, the patent box regime (which reduces the corporation tax rate to 10% on the profits attributable to certain R&D activities), and the announcement in the 2021 Budget of eight new freeports which create economic zones offering certain temporary tax breaks to companies.
There is nothing in the new proposals that affects a country’s prerogative to offer these regimes, and the benefits received by companies operating in the relevant jurisdiction only (for instance, a domestic UK group or indeed a global group operating below the threshold) will remain the same. However, one effect of a minimum effective tax rate is that where companies operating in jurisdictions which offer these tax incentives are part of a larger multinational group, there will be circumstances in which the benefits offered by such tax incentive regimes in particular jurisdictions will be neutralised by the obligation of the ultimate parent company to levy additional tax to make up for it.
It will be interesting to see whether and to what extent countries’ response to the proposals (either now or if and when legislated) involve a review of their domestic tax incentives as well as their domestic tax rates.
The short answer is: a lot more work. In many ways, settling on headline numbers may not be as significant as it first appears for as long as the mechanisms and formulae into which those numbers are ultimately going to be inserted are not yet finalised (and have a long way to go to become so).
There are also other crucial parts of the calculation (which could have just as large an effect on the ultimate scale, nature and distribution of taxing rights) which this communique did not touch on – the way in which the tax base will be determined being a prime example in both of the proposals.
In addition, one could argue that it is misleading to interpret the communique as actually having settled anything at all. Even the headline numbers of the minimum tax rate and the proportion of profits to be reallocated are described with the prefix ‘at least’, indicating that they are subject to move (if only upwards), so there is room for further change there.
The extent and manner to which economies whose ‘business model’ will be primarily hit by this (such as Ireland) will be supported through the period of transition remains to be seen too. As stated above, it will be important to monitor how the tax systems of these territories evolve.
In terms of process, these proposals now need to be put to the G20 in July, where they will be considered by a broader range of countries including China and India. For consensus on a basis sufficiently wide for the proposals to be effective on a global scale, they will then need to be put to the 139 members of the Inclusive Framework, which may well have differing opinions on their adequacy and efficacy.
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