G7 Finance Ministers reach consensus on Pillar 1 and Pillar 2 proposals

On Saturday 5 June 2021 the G7 finance ministers reached political consensus on proposals for a global minimum corporation tax of at least 15% to be determined on a country by country basis, the allocation of certain taxing rights between countries in respect of the "largest and most profitable multinational enterprises", and the removal of unilateral digital services taxes and other similar measures.

The OECD BEPS 2.0 Pillar 1 and Pillar 2 proposals have yet to be considered by the G20 and the 139 country OECD "Inclusive Framework". The G20 finance ministers are meeting on the 9 and 10 July 2021. The OECD Inclusive Framework will meet on 30 June and 1 July 2021. Wider political agreement is still to be reached and Pascal Donohue, the Irish finance minister, tweeted that "any agreement will have to meet the needs of small and large countries, developed and developing". Nevertheless, broader agreement this summer on both Pillars looks increasingly likely given the G7 consensus which brings momentum to the process and its ambitious timeframe for political agreement. 

The single paragraph on the matter in the communique that issued describes the consensus in general terms. While the UK Chancellor Rishi Sunak described the consensus as making sure that “the right companies paid the right tax in the right places”, a lot of questions remain about the scope of the measures. Concerning Pillar 1, the communique refers to "market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises". It does not specify the scope of the market countries, how profit or margin would be determined nor the scope of the multinationals to be affected. On the latter point, it is silent as to whether the OECD €750m threshold should be used and whether any industries should be excluded.

Concerning the Pillar 2 proposal, US Treasury Secretary Janet Yellen described the G7 consensus as "a significant, unprecedented commitment … that provides tremendous momentum towards achieving a robust global minimum tax at a rate of at least 15%". Previously the US had sought a minimum rate of 21%. The US' position moved to 15% in late May, somewhat higher than the rate of 12.5% that had been cited as being likely by some commentators and government officials. It is notable that the 15% rate is expressed as a minimum. A final agreed rate could be higher and the French finance minister Bruno Le Marie said that he would "fight to ensure that this minimum corporate tax rate is as high as possible”.

Reference is made in the communique to the minimum tax being applied on a county-by-country basis. This is a different approach to the US global intangible low-taxed income (GILTI) which allows blending of low taxed income with high taxed income. The communique is silent as to whether there should be a carve out for activities where there is substantial economic substance in a country.

In return for the agreement on the two pillars, unilateral digital services taxes are to be abolished. The communique also refers to "other relevant similar measures" without elaborating. This could cover the likes of the Australian and UK diverted profits tax (DPT) and the Australian multinational anti-avoidance law.

As regards to how the process to reaching political agreement should progress, on 11 June 2021 the OECD is due to send a paper titled "Building Blocks of an Agreement" to the members of the OECD Inclusive Framework. The members of the Inclusive Framework will have one week to respond. Sign off on principles will be on the agenda for the Inclusive Framework meeting on 30 June/1 July, and assuming Inclusive Framework sign off, endorsement should be considered by the G20 finance ministers at their 9/10 July meeting.

If there is political agreement in July, the detailed measures will have to be drafted, and after that implementation may take some time. Following the agreement on the original BEPS proposals it took countries on average two years to ratify BEPS tax treaty amendments.

For more information on this please contact Philip McQueston or any member of our Tax team.

Date published: 9 June 2021