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Report: The road is long for pillars one and two

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G7 finance ministers meeting in London reached a ‘seismic agreement’ on global tax reform that will mean ‘the largest multinational tech giants will pay their fair share of tax in the countries in which they operate’, the UK’s G7 presidency announced on 5 June.

Finance ministers also agreed to ‘the principle of a global minimum’ rate of corporate income tax intended to ensure that multinationals pay tax of ‘at least 15% in each country they operate in’. G20 finance ministers will discuss the agreement at their July meeting.

The G7 communiqué ( expressed support for the G20/OECD Inclusive Framework’s continuing efforts ‘to address the tax challenges arising from globalisation and the digitalisation of the economy and to adopt a global minimum tax’. The Inclusive Framework has 139 member countries and jurisdictions.

The finance ministers committed to reaching ‘an equitable solution’ on 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.

‘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,’ they said. ‘We also commit to a global minimum tax of at least 15% on a country by country basis.’

The agreement was ‘a landmark step toward the global consensus’ necessary to reform the international tax system, OECD secretary-general Mathias Cormann said, adding that there is important work left to do. ‘Finding agreement on international tax at the G7 is no mean feat and will light the touchpaper for the wider multilateral process at the OECD,’ said CBI chief economist Rain Newton-Smith.

Tax campaigners criticised the agreement. Alex Cobham, chief executive of the Tax Justice Network, said the G7 had decided to ‘finally move the international tax system into the 21st century but only enough to shamelessly benefit just themselves, leaving the rest of the world behind’.

Pillars one and two

The G7 finance ministers agreed on the importance of ‘progressing agreement in parallel’ on the two pillars of work established to complete BEPS Action 1 on ‘addressing the tax challenges of the digital economy’.

The ‘Made in America Tax Plan’ published by the Biden administration in April ‘jump-started’ the process by offering ‘a new approach for pillar one’s tax nexus and global profit allocation rules, and proposing a significantly higher global minimum tax rate under pillar two’, experts at Squire Patton Boggs noted (see Tax Journal, 6 May 2021).

The long road ahead

Pillar one is ‘technically simple(ish) but very challenging to implement,’ Dan Neidle, partner at Clifford Chance, told Tax Journal in response to the G7 agreement. ‘Pillar two is technically fiendishly complicated but easy(ish) to implement.’

‘Pillar one requires treaty changes, and “best case” is that it will be a slow process,’ Neidle said. ‘BEPS 1.0 took an average of two years for states to ratify, with Greece taking four years and Spain and a handful of others still not having ratified, and of course the US [which has not signed the BEPS multilateral instrument] entirely absent. But can the politics wait that long? The UK, France etc. surely won’t scrap their DSTs now based upon the hope of speedy implementation or ratification. But will that trigger US tariff retaliation?’

Neidle added: ‘More fundamentally, as I understand it, the UK and France only accepted pillar two (and the fact it tilts so heavily towards the US) on the basis that their tax bases would be increased by pillar one. If the US in fact never ratifies – which must be a serious possibility – have they been sold a pup?’

The ‘complication of pillar two’ creates its own challenges, and it will take many months to finalise the technical details, Neidle noted. ‘And then – whilst individual countries probably won’t have to go through a treaty ratification process – they will need to transcribe this into their own legislation. That will be a complex and lengthy process, and if done imperfectly (as it will be), it will create the potential for double taxation and double non-taxation. And, therefore, tax competition: “We have the most friendly pillar two implementation”. So this will be a very long road!’

‘Grand claims’

Given Chancellor Sunak’s declaration at the G7 meeting that ‘these seismic tax reforms are something the UK has been pushing for and a huge prize for the British taxpayer’, the PR challenge facing multinationals may be entering a new phase.

Judith Freedman, professor of taxation law at the University of Oxford, told Tax Journal that people are ‘perfectly capable of understanding that international tax is complicated and needs a lot of negotiations, with many countries, not just imposition by G7 nations’.

Making ‘grand claims of landmark deals does risk subsequent disappointment’, given how far there is still to go, Freedman said. ‘Indeed, we are already seeing commentators expressing concerns. Since the detail has still to be worked on and agreed, more measured claims might be more appropriate. Doubtless this political signalling provides some impetus for the remaining negotiations, but care needs to be taken to make others feel included in the decision making.’

What should multinationals be doing now? ‘For tax departments and their advisers there’s a familiar pattern to big reforms like this. We get excited a bit too early (in this case back in 2019 when BEPS 2.0 was first mooted), then take a breather,’ said Tim Sarson, international tax partner at KPMG UK. ‘There may be change on the horizon, but until it’s real most multinationals are reluctant to commit time or energy to getting their heads round it. Then suddenly it’s very real and they will spring into action.’

‘Now the real work starts. Like so many global initiatives before, it will quickly morph into two quite different exercises. At the strategic level we’ll be helping our clients to rethink their global value chain models, particularly off the back of pillar two,’ Sarson added. ‘Many were already contending with the post-pandemic world of hybrid working and virtual teams, so this is one more big upheaval to add into the mix. But on the ground the administrative burden will matter too. How will the calculations work in practice? How will they define ‘profit’? How can we get hold of and process the data we need to be able to comply?’