Legal development

Global Tax Reform - Some Key Questions

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    The G7's Finance Ministers' communiqué, setting out broad agreement on a long overdue reworking of the global tax system, has made front page news as "historic" and "seismic". Indeed, we cannot remember when we last saw so many tax articles placed so prominently in the press. However, the tax part of that communiqué was actually only one paragraph long. Unsurprisingly, major questions and implementation hurdles remain. We set out some of our key questions below.


    The proposals seem to mirror the Pillar One and Pillar Two blueprints set out by the OECD, but questions remain as to the extent to which the G7 now accepts the detailed proposals in those OECD blueprints. Another important consideration is whether the G7 will now be able to persuade other jurisdictions to get on board with these proposals? Further discussions will take place at the end of this month in readiness for the meeting of G20 Finance Ministers on 9 – 10 July.

    Pillar One – reallocating taxing rights based on the revenue generated in a country rather than location for tax purposes

    "We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises."

    To what types of businesses will the new allocation right apply? The communiqué refers to "the largest and most profitable multinational enterprises". The OECD's proposals contemplated reallocation of profits of providers of automated digital services and consumer facing businesses only. Does the broad statement in the communiqué indicate that all businesses and industries above a certain size would now be in scope? This would have the benefit of removing enormous amounts of complexity from the rules in determining the nature of businesses or income streams potentially within scope, but moves the proposals away from the original spirit of the reforms which were aimed at the digital economy (however that should be defined…) only.

    What will be the size threshold for the rules to apply? The OECD proposals mooted a €750m global revenue threshold, together with a de minimis in respect of in-scope revenue, but the US more recently suggested financial thresholds (reported to be set at $20bn global revenues combined with a net profit margin hurdle) aimed at restricting the Pillar One rules to the largest 100 or so companies. The G7 communiqué gives nothing away in this respect.

    Will there be an exemption for the financial services industry and, if so, how extensive might this be? The OECD proposals have always included such an exemption as a possibility but latest reports indicate that the US wish to exclude this from the final design of the reforms. Whilst the UK may be keen on that exemption and have good grounds for that view, reports suggest that it may be seen as special pleading in some quarters (or, to use an over-used phrase, another example of our "cake-ism").

    How and to whom will the allocation of taxing rights be made? The communiqué states that "market countries will be awarded taxing rights on at least 20% of profit exceeding a 10% margin". The method of allocation is not a new issue; the blueprint for Pillar One contains detailed proposals on both nexus and revenue sourcing rules and, in the absence of further information, we assume that these issues will continue to be taken forward as already discussed. If the scope of the reallocation rules is extended to all businesses, both nexus and revenue sourcing rules will need to be expanded considerably.

    Is the 10% margin fixed in respect of all industries? A point left open for discussion in the OECD's blueprint was the appropriate margin above which "residual profits" could be reallocated. It was thought that there would need to be a detailed matrix setting out the appropriate margins for varying "baseline" activities across different industries and sectors and, potentially also tailored to the specific geographical market. Sweeping these considerations away would be a huge simplification but would inevitably result in winners and losers. This has also made the front pages with the very public discussion about the different profit margins attributable to different Amazon business lines.

    Pillar Two - setting a minimum global corporation tax rate

    "We … commit to a global minimum tax of at least 15% on a country by country basis"

    Will 15% be the final figure for a minimum rate of tax? The G7 "commit to a global minimum tax of at least 15% on a country by country basis" but it is notable that several countries may press for higher rates, including the US and France in particular. The US has previously stated that "15% is a floor and that discussions should continue to be ambitious and push that rate higher", reflecting a concern that 15% is below the 21% level the US has been seeking for US companies' non-US income. France has described the 15% as a starting point only and wishes to raise the minimum rate as high as possible. Against this will be those countries with a tax rate currently below 15% (e.g. Ireland, Cyprus and Hungary) which would lose their competitive advantage.

    How will the effective tax rate be calculated? Again, this is not a new question but much work still needs to be done to determine appropriate adjustments to consolidated financial statements, how deferred tax will be treated and developing rules to mitigate the impact of volatility, such as the carry forward of losses. To be effective, the effective tax rate will need to prevent local accounting methodologies being used to circumvent the minimum tax but requiring extensive adjustments to accounting profits will increase complexity and compliance costs for both multinational groups and tax authorities reviewing the computations.

    Will there be any exclusions from the global minimum tax rate? The OECD blueprints contemplated exclusions for investment and pension funds, governmental entities (such as sovereign wealth funds) and international and non-profit bodies. The G7 communiqué does not go into sufficient detail to indicate whether this has been considered further.

    The end of Digital Services Taxes

    "We will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies."

    The communiqué clarifies that agreement on the above issues will result in the repeal of the plethora of local digital services taxes. That should be a very welcome development to those digital businesses currently having to wrestle with the introduction of multiple domestic regimes but questions remain as to how this outcome will be secured and the timeframe for taking this action


    The great unknown is how and when this will be implemented. For example, to what extent will this need to be set out in binding treaties? A major question there relates to the ability of the current US administration to effect treaty change. Or could the need for treaty changes be sidestepped at this stage? In this regard we note that the US never signed the OECD's recent BEPS multilateral instrument (albeit that they do follow many of the BEPS proposals). And the UK's diverted profits tax and digital services taxes more widely show what can be done even without changing double tax treaties.

    Since no further details have been revealed at the Leaders' summit this weekend, the question is whether these details will emerge at the 9-10 July Venice meeting of the finance ministers of the G20.

    Prepared by Vicky Brown, Nicholas Gardner, Sharon Kim and Paul Miller.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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