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Global Tax Reform – The Minimum Tax Rate Was Adopted
On June 5, 2021, Members of the G7 (which include Canada, France, Germany, Italy, Japan, the UK and the US) agreed to conclude an historic international agreement on global tax reform, which will change a lot for big international companies and make them pay their contributions.
A global minimum rate was adopted, which ensures multinationals pay tax. The purpose of a global minimum tax rate is to disincentivize the shifting of profits to lower tax jurisdictions. The idea was to force multinationals to pay tax in the jurisdictions where their goods and services are sold, but this has proved impractical, so the actual proposals are a little different.
The US proposals are an amendment of the US’s Global Intangible Low-Taxed Income (GILTI) tax rules. These rules charge additional tax in the US for US companies that pay a lower tax rate elsewhere, topping up their tax obligation to US levels. GILTI also prevents the application of tax credits against US taxes arising from investments in low tax jurisdictions.
This approach mirrors that of the Organisation for Economic Co-operation and Development (OECD)/G20’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS)’s Pillar Two proposal, which is intended to be a comprehensive agreement on jurisdiction-by-jurisdiction global minimum taxation. The income inclusion rule proposed under Pillar Two applies on a “top down” basis, meaning that it is applied only by the ultimate parent entity of a multinational group and not applied to lower-tier holding companies of at least 15% in each country they operate in.
Besides, at the meeting Ministers committed to oblige their national firms to report the climate impact of their investment decisions and develop concrete measures to track down environmental criminals.
Global Tax Reform
During the meeting, Finance Ministers agreed on the principles of an ambitious two-Pillar solution to tackle the tax challenges arising from the digital global economy.
According to Pillar One, the largest and most profitable multinational companies will be required to pay tax in the countries where they operate, and not just where they have their headquarters. This requirement will apply to global firms with at least a 10% profit margin.
Under Pillar Two, at least a 15% global minimum corporation tax operating on a country by country basis is to be implemented.
The reform will be further discussed at the G20 Financial Ministers and Central Bank Governors meeting in July.