Proposal for a 15% minimum corporate tax rate by the G7

16 Jul 2021

R&D Tax Credits

During the G7 summit in June 2021, finance ministers from the G7 countries (Canada, France, Germany, Italy, Japan, the UK and the United States) backed the implementation of a global minimum corporate tax rate of 15% which could form the basis of a minimum worldwide corporate tax rate, subject to further agreement.

This is part of the initiative to prevent multinational enterprises from shifting profits and tax revenues to low tax jurisdictions and follows on from the Base Erosion and Profit Shifting (BEPS) initiative led by the Organisation for Economic Cooperation and Development (OECD) and G7 countries. This initiative has successfully culminated in changes to tax treaties and domestic legislation across a large number of countries since 2016, promoting a fairer international tax system.

The OECD’s ‘BEPS 2’ projects go further, with the proposals for two ‘pillars’ to address tax issues on digitalisation, although these will also affect large multinational non-digital businesses too. Pillar 1 affects taxing rights and proposes the creation of new income apportionment and nexus rules to allow jurisdictions to tax certain multinational enterprises on income earned in a jurisdiction where such multinationals might not have a physical presence, whilst the Pillar 2 GloBE proposals would create a global minimum tax rate. The OECD released two ‘blueprint’ documents outlining its proposals on each pillar in October 2020.

Negotiations on Pillar 1 and Pillar 2 are expected to move forward at the G20 economy and finance ministerial meeting in Venice in July 2021, which would allow an opportunity to create a broader consensus with additional nations, including Australia, Brazil, China, India, and South Korea.

The global minimum tax rate would apply to overseas profits, so governments would still have the jurisdiction to set their local corporate tax rate, but if companies pay lower tax rates on income in a particular country, their home governments could ‘top-up’ their taxes to the minimum rate, eliminating the advantage of shifting profits to lower tax jurisdictions.

Much detail still needs to be negotiated on this proposal, including how to determine which multinational companies the tax will be applied to. The current OECD proposal is that the Pillar 2 minimum tax rate would only apply to groups within the scope of country by country reporting (ie global turnover of at least €750 million).

Any final agreement would have repercussions for low-tax countries and tax havens, plus potentially the Republic of Ireland, which has boomed from inward investment from large multinational digital companies in recent years.