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Progress towards a multilateral solution in international taxation

Tax Alert - July 2021

By Jeremy Beckham
 

In 2019 the New Zealand Government set out a framework for a digital services tax (DST) in addition to an outline of the measures being progressed through the G20/OECD Inclusive Framework (a collection of 135+ countries) for reform of the international tax framework. Since that time, the Government has maintained that its preferred approach is to work within the Inclusive Framework to find a multilateral solution for reform. That said, the Government has also reiterated on a number of occasions that a DST is not off the cards and they stand ready to implement one in the event the Inclusive Framework project fails to reach agreement within a reasonable timeframe. Given this background, it is very welcome news that on 5 June 2021 the G7 finance ministers published a communiqué expressing support for efforts underway through the Inclusive Framework and setting out high-level political agreement on global tax reform.

In October 2020, the Inclusive Framework released two detailed “blueprints” on potential rules for addressing nexus and profit allocation challenges (“Pillar One”) and for global minimum tax rules (“Pillar Two”). Those proposals were updated and simplified by the Biden Administration in April 2021 and formed the basis for the political discussions by the G7. Some of the key design features agreed to in the one paragraph of the communiqué dedicated to the tax changes are noted as follows:

  • The Pillar One approach puts the “largest and most profitable multinational enterprises” in scope of so-called “Amount A”. This mirrors language in a widely circulated presentation made by the US Treasury which explained the goal is to shrink the pool of multinationals to no more than 100 companies. The exact thresholds have yet to be agreed, however this would appear to be a move away from the original scope of the blueprint which included only “automated digital services” and “consumer facing” business.
  • There is some agreement of the “Amount A” formula in the Pillar One approach. The communiqué requires sharing with market countries “at least 20%” of the profits in excess of a 10% profit margin. This establishes that the G7 sees the 20% figure as a floor, but other countries at the inclusive framework may seek to raise this percentage.
  • There is some agreement of the global minimum tax rate in the Pillar Two approach. The communiqué provides that the G7 finance ministers commit to a global minimum tax of at least 15% on a country by country basis.

Additionally, there is a commitment from the G7 to provide for appropriate coordination between the application of the new international tax rules and the removal of all DSTs and other relevant similar measures from all countries. Our detailed Deloitte commentary on what was agreed by the G7 finance ministers can be found here.

The crucial next step will be to get agreement between the G20 finance ministers in their upcoming meeting on 10-11 July. At the time of publication, the Inclusive Framework will be meeting to discuss what sort of consensus political agreement can be reached with respect to both Pillars One and Two. As such, the discussions that take place over the next few weeks may prove pivotal in reaching the OECD-led consensus based change to our international tax framework that the Inclusive Framework has now been working towards for some time (and that New Zealand as a member of the Inclusive Framework will look to follow suit and adopt). Even if a consensus is reached however we do note there is significant further technical work that needs to be undertaken to facilitate any changes agreed to, which are unlikely to be implemented before 2025 at the earliest.

July 2021 Tax Alert contents

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