G7 Finance Ministers agree on taxation of digitalised economy and global minimum rate

On 5 June 2021, the G7 finance ministers published a communiqué which sets out high-level political agreement on global tax reform, including the reallocation of a share of the global residual profit of certain businesses to market countries and a minimum effective tax rate in each country in which a business operates of at least 15%.

Since 2017, the 135+ member countries of the G20/OECD Inclusive Framework on BEPS ("inclusive framework") jointly have been developing a “two pillar” approach to address the tax challenges arising from the digitalization of the economy. This led to the publication of two detailed “blueprints” in October 2020 on potential rules for addressing nexus and profit allocation challenges (Pillar One) and for global minimum tax rules (Pillar Two). The proposals were updated and simplified by the US Biden Administration in April 2021 and formed the basis for the political discussions by the G7.

Key features of the agreement and the Irish perspective

Nexus and profit allocation rules (Pillar One)

Pillar One’s Amount A proposal reallocates taxing rights in favour of market countries through the creation of a new taxing right. A share of a group’s global residual profit will be reallocated to market countries using a formulaic approach. No physical presence is required in a market country to create a new nexus (taxable presence).

The G7 have reached agreement that Amount A should apply to the “largest and most profitable” multinationals. This is in line with proposals put forward by the Biden Administration earlier this year. This supersedes the OECD Pillar One blueprint’s scope that included only “automated digital services” and “consumer facing businesses.” Further clarity is needed in respect of the thresholds for determining businesses that are the largest and most profitable.

In-scope businesses would reallocate at least 20% of their residual profit above a 10% profit level to market countries. This is expected to be calculated as the ratio of profit before tax (derived from consolidated group financial accounts prepared under an eligible accounting standard such as IFRS with minimal book-to-tax adjustments) to revenue, as set out in the OECD Pillar One blueprint.

Also in line with the OECD Pillar One blueprint, any Amount A liability would be allocated between “paying entities” and relieved via either exemption or credit.

The G7 stresses that implementation will be coordinated with the removal of all digital services taxes (DSTs) and other relevant similar measures.

The Irish perspective:

The abovementioned proposals from the Biden administration may make implementation somewhat easier but work remains to ensure that any agreement reached is mindful of the need to continue to support business and provide certainty of application. Navigating the timing aspects associated with any agreement reached for implementation of Pillar 1 with the removal of all digital services and other unilateral measures is likely to be a key hurdle that will need ironed out as negotiations progress.

Global minimum tax (Pillar Two)

The Pillar Two proposal comprises a set of interlocking international tax rules designed to ensure that large multinational businesses pay a minimum level of tax on all profits in all countries. The OECD Pillar Two blueprint proposed that multinational groups with consolidated revenues of EUR 750 million or more would be in scope.

Where the tax on profits otherwise would be below an agreed minimum effective tax rate, the “income inclusion rule” would result in additional “top up” amounts of tax being payable by the ultimate parent entity of the group to its tax authority. The “undertaxed payment rule” would apply as a secondary rule where the income inclusion rule has not been applied.

The G7 have agreed that the minimum effective tax rate in each country in which a business operates should be at least 15%. (The OECD Pillar Two blueprint was silent on what the minimum effective tax rate should be, but 15% had been put forward by the US Treasury).

The Irish perspective:

Based on the Pillar 2 blueprints issued on 12 October 2020, in countries where the effective tax rate is below the minimum rate, a formulaic carve out will exclude an amount of profit from the calculation of the additional top up taxes due, intended to represent a fixed return for substantive activities less susceptible to BEPS risks. The carve out will have two interlocking components (a payroll component and a tangible asset component). The design of this potential substance based carve out, and how it interacts with an agreed minimum tax rate, will be an important consideration for Ireland in the context of the 12.5% rate. To access further comments on the Pillar 2 blueprint, click here.

Pillar 2 is also likely to be influenced by the EU context. From an EU law perspective, consideration may need to be given to the interaction between minimum tax rules under Pillar 2 and the principles laid down in decisions such as Cadbury Schweppes. The case found that Controlled foreign company (CFC) rules infringed on the taxpayer’s freedom of establishment, and such infringement could only be justified by the parent jurisdiction where the rules targeted “wholly artificial arrangements”. From an Irish and wider EU perspective, the implementation of Pillar 2 is likely to be contingent upon a Directive which is compatible with EU law


Political agreement among the world’s largest economies is a huge step for international tax reform and signals a welcome return to a multilateral approach. Further political agreement (notably at the G20 and OECD inclusive framework) is needed, but businesses will recognize the impetus that the G7 agreement gives to addressing the tax challenges of the digitalized economy.

Key questions remain (in particular around scope) and there are technical areas that the OECD will continue to work through. The Biden Administration also will need to persuade the US Congress to pass the proposals. The next number of months will prove critical in terms of how Biden’s proposals for US tax reform and the knock on impact on OCED negotiations will evolve.

The G7 have agreed that the largest and most profitable businesses should reallocate a share of global residual profit to market countries under Pillar One. No detail is yet available on how to determine the largest and most profitable but the Biden Administration proposals indicated that the rules should focus on around 100 of the largest global businesses. Further discussions are expected in respect of whether segmentation would be required where a group has a mixture of highly profitable and less profitable activities, and whether certain sectors such as extractives and financial services should be excluded from scope.

A key component of the agreement is the commitment for the implementation of Pillar One to be coordinated with the removal of unilateral digital services taxes and similar measures. A practical consideration is how this will be achieved in reality, with the US likely to want agreement for the removal of digital and related taxes before signing up to Pillar 1, and countries who are in favour of digital taxes likely wanting comfort that the US will sign up to Pillar 1 before eliminating such unilateral tax measures.

The G7 also have agreed to a global minimum tax under Pillar Two of at least 15%, calculated on a country-by-country basis. The Biden Administration plan to amend the US global intangible low-taxed income (GILTI) regime to bring it into much closer alignment with Pillar Two’s income inclusion rule, as well as raising the GILTI minimum tax rate, as part of domestic changes to increase corporation tax rates.

The G7 agreement is brief and focusses on the big picture framework. It makes clear that the two pillars will continue to progress, politically and technically, in parallel. Other areas of the Pillar One and Two proposals, such as a fixed marketing and distribution function return (Amount B), the design of an undertaxed payments rule, and any treaty changes for a “subject to tax” rule remain under discussion

From an Irish perspective, Minister Donohoe expressed his view in a media interview as follows:

“The tax environment that is developing at the moment is one also that the multinationals are evaluating at the moment. The reason that I’m very positive about our country’s future and our economy is twofold. Firstly it’s the longevity of the investment we have in Ireland. Much of the FDI investment in Ireland that we are referring to is investment that has now been in Ireland for many decades. It’s well embedded in terms of the physical infrastructure of our country….Those who are responsible for that FDI, those who are responsible for leading it, and indeed those who are responsible for domestic investment in our country, have always seen transparency from this and previous Irish governments and they have seen our long-standing efforts to be predictable and to be clear about how we will respond to change.”

The above comments from June 2021 also echo the Minister’s views from 21 April 2021 that any agreement on Pillar 2 should have regard “to those countries that consciously decide to follow a substance based industrial policy on being small but open for investment. I believe that small countries, and Ireland is one of them, need to be able to use tax policy as a legitimate lever to compensate for advantages of scale, location, resources, industrial heritage and the real, material and persistent advantage enjoyed by larger countries”.

Clearly Ireland has taken a strong political stance in relation to its defence of Ireland’s 12.5% corporate tax regime, and will now be focused on engaging as part of ongoing OECD negotiations around the minimum tax rate proposals, the design and impact of any substance based carve out on a minimum tax rate proposal, and seeking to ensure that any agreement reflects the requirements of smaller economies. Ongoing work is likely on quantifying the impact and timing of any agreed OECD measures from an Irish exchequer perspective (estimated cost to Ireland of circa. €2 billion currently), and additional policy responses that Ireland may need to prioritize/accelerate in the coming years to ensure its attractiveness as a pro-business and inward investment location.

Next steps

The G7 communiqué hopes that agreement will be reached between the G20 finance ministers in their meeting of 10-11 July 2021. The G20/OECD inclusive framework is due to meet and discuss the revised Pillar One and Pillar Two proposals on 30 June–1 July 2021.

Significant further technical work also is needed and implementation, including through a multilateral instrument to facilitate double tax treaty changes, will take time and is unlikely based on current soundings to be before 2025, at the earliest. Political factors in the US may however have the effect of making a 2025 implementation date unworkable (with the US pushing for an earlier 2023 implementation date) where the current administration is unwilling to wait for a global consensus on minimum tax. A key focus for business therefore is the potential for the US to implement their own tax reform measures, leaving the OECD with the task of catching up. Indeed, given the need to fund proposed infrastructure and spending proposals in the US, 2021 will be a critical year for the Biden administration to push through proposed US tax reform measures.

In the event that the Biden tax proposals are adopted in their current form or with some level of variation, this will have a significant and more immediate impact for many US multinationals, and Irish headquartered groups with significant investment in the US, with any OECD agreed measures playing out thereafter. In particular, proposed increases to the US federal and GITLI tax rates, and the proposed abolition and replacement of the BEAT measures with the SHIELD proposal, if adopted, will become a real priority for business in the near term, with some groups already undertaking high level impact assessments and assessing restructuring alternatives.

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