G20 Signs Agreement on Minimum Global Tax Rate

On July 10, financial leaders of the G20 countries signed the agreement on the establishment of a minimum tax rate for multinational companies. This tax reform is a step towards preventing international corporations from transferring assets overseas for tax evasion purposes.

The agreement will set a global minimum corporate tax of at least 15%. This should prevent multinationals from registering exclusively in countries with the lowest tax rate. They now have to pay income tax wherever they sell products and services and not just at their headquarters location.

Which Countries Did Not Sign the Agreement?

German Finance Minister Olaf Scholz confirmed that all G20 countries joined the agreement. However, US Treasury Secretary Janet Yellen added several countries remained opposed to signing. These include low-tax countries such as Ireland and Hungary, but they will be asked to sign the agreement again this October.

In addition to the EU countries – Ireland, Estonia and Hungary – other countries that did not join the agreement include Kenya, Nigeria, Sri Lanka, Barbados and Saint Vincent and the Grenadines.

We mentioned previously that the reform of the international system of corporate taxation consists of two pillars: the first one regulates the redistribution of tax rights, while the second one establishes the minimum global taxation.

Which Companies Does Pillar 1 Apply To?

The first pillar targets the largest and most profitable multinational enterprises (TNEs) regardless of industry classification or business model. These companies have a global turnover of over € 20 billion.

Extractive industries and regulated financial services are excluded from the first pillar.

Which Companies Does Pillar 2 Apply To?

This pillar will apply to all transnational groups above the € 750 million threshold for aggregate financial income. This means that minimum effective taxation measures will be applied to all large multinational enterprises. Moreover, countries are free to apply an additional tax to the parent company in case of low tax rates, even if they do not reach the € 750 million threshold.

Government agencies, international organizations, non-profit organizations, pension funds or investment funds that are the parent companies of the TNEs are not covered by Pillar 2.

Is the OECD Agreement Binding on All Members?

After the coordination and transformation of the agreement into a multilateral convention in October, the application of Pillar 1 will become mandatory for the participating countries.

Pillar 2 will be applied within the “general approach” framework. This means that members of the BEPS Inclusive Team (“Base Erosion and Profit Shifting”) are not required to accept the rules set by the reform, but they will have to implement their own rules and regulate them in a way that is consistent with the rules set out in Pillar 2.

What Are the Next Steps for the Implementation of the Global Tax Reform?

It is planned that all 139 members of the Inclusive Framework will be invited to negotiate the final formalization and signing of the agreement in October. As soon as the global agreement is reached on both pillars, which is satisfactory for all participants, the European Commission will propose measures for their implementation in the EU in accordance with the EU tax agenda and requirements of the single market.

Sources:

https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3564

https://ec.europa.eu/commission/presscorner/detail/en/ip_21_3582

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