Last Saturday, June 5, the G7 finance ministers and central bank governors, meeting in London, issued a communique in which they “strongly support” the G20/OECD efforts to reform the global taxation of corporations, including a commitment to institute “a global minimum tax of at least 15% on a country-by-country basis” on multinational companies and to reach “an equitable solution on the allocation of taxing rights” among countries. Also participating in the meeting were the heads of the International Monetary Fund (IMF), the World Bank Group, the Organisation for Economic Cooperation and Development (OECD), and the Eurogroup. This major step is expected to set the stage for agreement in Venice next month at the meeting of the G20 group of 19 nations that includes Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia, and South Africa, in addition to 11 OECD nations and the European Union. Positive endorsement by the G20, the premier forum for international economic cooperation, should provide significant momentum to the ongoing discussions and negotiations at the OECD among a larger group of 139 nations, aimed at reforming the international tax system to meet the challenges of the digitalization of the global economy.
The OECD’s work on international taxation goes back decades and focused initially on eliminating tax barriers to cross-border trade and investment. The OECD Model Tax Convention provides the basis for over 3000 bilateral tax treaties. In the 1990s, when the secretariat team supporting the OECD’s taxation activities were part of the Financial, Fiscal and Enterprise Directorate, which I headed, the areas of tackling tax evasion and avoidance, and increasing tax transparency between tax administrations were developed, as was capacity-building support to nonmember countries, including Central and Eastern European nations that had emerged from Soviet Union control. Today, the OECD’s Center for Tax Policy and Administration has a secretariat team of some 200 tax experts from more than 40 countries that work with OECD’s 38 member nations and over 100 nonmembers on a wide range of tax issues.
Over the past decade, the OECD has partnered with the G20 to develop a major overhaul of the international tax architecture, which was based on 100-year-old concepts. The central objective is to ensure that profits of multinational enterprises are not shifted away from the locations where economic activities and value creation take place. The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project was launched by the G20 in 2013. A package of 15 BEPS measures was endorsed by the G20 and the OECD in 2015, leading in 2016 to the creation of the OECD/G20 Inclusive Framework on BEPS, under which some 139 countries and jurisdictions are working together on the tax architecture reform. The reformed system is planned to include effective implementation through a robust peer review process.
The Inclusive Framework calls for a two-pillar approach:
Pillar One addresses the allocation of taxation rights among countries. Existing rights rely on the concept of physical presence. This century-old concept fails to fairly allocate taxing rights in an increasingly digitalized economy. Today, highly digitalized companies can earn substantial profits in a jurisdiction without the need for a physical presence. This has led the UK, France, and Italy to impose Digital Service Taxes, to which the US has strongly objected. The G7 expressed their commitment to awarding market economies “taxing rights on at least 20% of profits exceeding a 10% margin” in the locations where the profits are generated. This new approach to taxation would apply to the largest and most profitable multinational enterprises. The G7 indicated that it will provide for coordination of the application of the new rules and the removal of all Digital Services Taxes. This deal will require US legislation approved by Congress and wide global agreement.
Pillar Two would ensure that multinational enterprises pay a global minimum level of corporate tax of at least 15% on a country-by-country basis. This measure would allow the global minimum tax rate to be levied on profits made in any country with a lower rate. The Biden administration strongly supports this proposal, which would raise more tax revenue for the US.
The G7 Communique calls for “progressing agreement in parallel on both Pillars,” an indication that the two Pillars represent a balanced compromise that is permitting this major international reform to go forward. The US wishes to end the race to the bottom for corporate tax rates and to dissuade companies from moving headquarters to tax haven countries. The Europeans and others seek to have large digital businesses taxed in countries where these businesses generate profits. The political agreement at the G7 level is very encouraging, but there still a long road ahead before a reformed global taxation system can be fully agreed and implemented. In addition to obtaining the necessary political agreement, there are a number of technical issues that remain to be resolved, such as which companies would fall within the scope of the agreement. And we already have the UK Chancellor of the Treasury pressing for financial services, including global banks with head offices in London, to be exempt from the plan.
Whatever the final outcome will be, it is refreshing to see this return to multilateral cooperation between the major market economies of the world, with full participation of the United States, proceeding with an inclusive process involving a wide range of other countries. US Treasury Secretary Janet Yellen commentated that the G7 meetings last weekend “emphasize the power of global cooperation in addressing the most critical issues we face.”
It is also good to see the United States making use of multilateral institutions, such as the OECD, that have been established to facilitate international cooperation. The forerunner of the OECD was the Organisation for European Economic Cooperation (OEEC) formed after World War II to administer the American and Canadian aid under the Marshall Plan for the reconstruction of Europe. The OEEC was transformed into the OECD in 1961. Since then, it has been advising governments on policies that support resilient, inclusive, and sustainable growth, working largely with committees of government officials and experts. For example, the policy areas covered by my Directorate included not only taxation, but financial markets, corporate governance, competition and anti-trust, liberalization of capital movements, foreign direct investment and multinational enterprises, along with the global challenges of money laundering, terrorism finance, and bribery in international commerce. This list represents just a fraction of the areas across the public policy horizon addressed by the organization.
Bill Witherell
Chairman of the Board & Chief Investment Officer
Email | Bio
Sources: Financial Times, Oxford Economics, ETF.com, chinalastnight.com, Goldman Sachs Economic Research, South China Morning Post, Reuters.
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