A new global tax regime is in sight, but the road to its approval is long and bumpy
The deal could mark a significant shift: Finance ministers of the G7 agreed on a potentially historic reform of the global tax regime on Saturday. The deal is resting on two pillars. Under Pillar One, global firms with at least a 10% profit margin would see 20% of any profit above the 10% margin reallocated and then subjected to tax in the countries where they operate. Under Pillar Two, multinationals are subject to a minimum tax rate of 15% in each country where they operate. This is a significant shift from the current approach, whereby companies can pay their taxes in the countries where they have headquarters.
What does this mean for digital services taxes? The agreement could remove the need for digital services taxes (DSTs), which have been introduced in recent years by several jurisdictions. In our Platforms and Big Tech Tracker, we’ve recorded 12 initiatives to introduce DSTs, 10 of which have either been approved or are pending approval. The main driving force behind these initiatives was the significant shift in trade from offline to online activities, which has deprived individual countries of tax revenue due to the global nature of digital trade. The G7 agreement addresses this point, and has led G7 countries, including the UK, to commit to the removal of the measures currently in place. It is worth noting that some of these national measures have a sunset clause, in view of a possible agreement at the international level.
Bringing certain countries on board will be a challenge: Despite the agreement at the G7 level, there is still a long and bumpy road ahead before the reform is complete. Firstly, the G7 needs to win the backing of the wider G20 group, which will meet in July. Secondly, the agreement leaves much of the detail to be decided at the OECD-level, where 139 countries are already (and have been for some time) involved in the negotiations. For example, the French Government has signalled its intention to advocate for a higher minimum rate, ensuring that it is “as high as possible”. On Monday, the share prices of Big Tech firms barely moved, despite the potential impact of the reform on Amazon, Apple, Facebook, and Google. This may partially be explained by the fact that some of these companies (such as parts of Amazon), operate with a margin below 10% and so fall outside of the scope of Pillar One. The deal is also unlikely to impact these companies unless it is agreed by countries such as Ireland, which has attracted considerable investment from Big Tech due to its low rates of tax.
Source: https://www.g7uk.org/g7-finance-ministers-agree-historic-global-tax-agreement/
