The road ahead for the global corporate tax deal
The G7 has an opportunity to push the global corporate tax deal – which tackles aggressive tax avoidance practices – over the finish line, and secure political support for its timely legislative implementation
Over the past decade, G7 members have played a critical role in addressing aggressive corporate tax avoidance by supporting reform of the legal architecture for international business taxation under the auspices of the G20 and the Organisation for Economic Co-operation and Development. The G7’s recent endorsement of the Base Erosion and Profit Shifting Inclusive Framework’s two-pillar solution provided crucial political momentum for the project that culminated in the historic global corporate tax deal signed on 8 October 2021. That agreement has now been adopted by 137 tax jurisdictions worldwide.
Given the rapid pace of developments since the landmark agreement and the OECD’s ambitious two-year implementation timeline, G7 and world leaders should reaffirm their commitments through international agreements and secure the political support for legislative implementation.
Progress this year
The global corporate tax deal signed in October addresses aggressive tax avoidance practices by the largest multinational corporations, by ensuring they pay more tax where they earn their profits. The OECD is taking a phased approach to rolling out the new rules under both pillars and plans to finalise them in 2022 in consultation with the public and industry stakeholders. It also ambitiously aims to coordinate the simultaneous implementation of the necessary domestic laws by 2023.
Pillar One targets tax avoidance by digital services firms. It introduces significant changes to how taxation rights are allocated between states and thus departs substantially from historical tax norms such as the arm’s length standard and the concept of permanent establishment. In February 2022, the OECD launched a public consultation on the tax challenges of digitalisation and the first building block of Pillar One and received inputs in early March. Technical negotiations on a new multilateral convention to implement Pillar One are also underway. In April, the OECD received public input on draft domestic legislative rules for Amount A of Pillar One and solicited public comments on excluding the financial services and extractives industries. The OECD anticipates the new rules will reallocate over $100 billion of profits among tax jurisdictions when implemented.
Pillar Two applies to multinational corporations with aggregate revenue above €750 million a year. It establishes a global minimum corporate tax rate of 15% and a top-up tax for large multinationals when their effective tax rate is below this threshold. The OECD completed the technical design of the second pillar on 20 December 2021, when it published detailed rules on the scope and mechanism underpinning the Global Anti-Base Erosion (GloBE) regime. In March 2022, the OECD released further technical guidance and commentary elaborating the finalised rules.
Key challenges on the road ahead
If all goes according to plan, 2022 will likely be a critical year for finalising the rules envisioned under both pillars. By mid 2022, the OECD will have held a high-level signing ceremony for a multilateral convention implementing Pillar One, and intends to finish its work on Amount B by the end of the year. Furthermore, it has committed to developing a multilateral instrument for the Subject to Tax Rule to facilitate the coordinated implementation of the GloBE rules.
The German G7 presidency has lauded the G20-OECD project as a “major step towards greater tax fairness around the world”. The G7 has repeatedly affirmed its commitment to the swift and coordinated implementation of the two-pillar package. However, to successfully implement the deal, world leaders must take advantage of the political momentum and secure legislative support at the subnational and national levels. Much progress has indeed been made garnering support for the deal, as shown by the agreement of Ireland and Cyprus to raise their corporate tax rate from 12.5% to 15%, the launch of public consultations in the United Kingdom, and the European Union’s efforts to implement a directive on the GloBE rules this coming year.
However, despite the unprecedented consensus behind the landmark tax deal since October, recent events demonstrate that international tax governance remains highly political and that the simultaneous and coordinated actions needed to implement it may encounter roadblocks. Poland opposed the tax directive at a meeting of EU finance ministers in April 2022, and thus it is an open question, given the EU’s unanimity requirement, whether a single state could undermine swift efforts. The French presidency of the EU ends in June 2022 and will diminish a committed France’s influence in the bloc. Similarly, in the United States, the deal’s implementation will require congressional approval. Due to the Biden administration’s difficulty negotiating its ambitious Build Back Better domestic spending plan, it is unclear whether provisions related to the global corporate tax deal will ultimately pass.
Before moving into further domains of reform including tax transparency, carbon pricing and the taxation of crypto-assets, the G7 should redouble its efforts to push the current deal over the finish line. The failure of a significant economy such as the US or EU to implement the agreement could be fatal to the G20-OECD project overall and risk a return to unilateralism in digital services taxation. Therefore, G7 leaders should seize the opportunity to implement the deal at the international level and form domestic political coalitions to ensure its timely legislative passage.
