Monday, August 5, 2019

G7 leaders push ahead with global minimum tax

The finance ministers of the G7 countries have agreed that a global minimum tax should be introduced to ensure companies like Facebook and Amazon pay their fair share of tax

During the two-day meeting on 17-18 July in Chantilly, France, ministers said that pillar two of the OECD’s proposals on how to tax the digital economy required a minimum level of effective taxation. In addition, new nexus rules designed under pillar one need to address new business models, such as highly digitalised business models, allowing companies to do business in a territory without any physical presence.

Using the US global intangible low-tax income (GILTI) regime as an example, which applies a 10.5% tax on overseas intangible income to discourage profit shifting, ministers said a similar global minimum tax could curb criticism that unilateral digital tax proposals discriminate against US companies. However, the rate of the minimum tax "would depend on concrete design features of the rules", according to the G7 chair’s summary.

Steven Mnuchin, US treasury secretary, said that the leaders have made significant progress in discussions on taxing the digital economy, but more steps need to be taken.

The G7 ministers said tax certainty, simplicity, ease of administration and the avoidance of double taxation should underpin any new international tax rules agreed by the OECD Inclusive Framework on digital tax.

However, taxpayers are surprised that a global minimum tax was an answer to the challenges under the digital economy given it does not fall within the scope of BEPS.

Georg Geberth, director of global tax policy at Siemens, told International Tax Review: "Business has not been waiting for a proposal for a minimum tax. It comes as a surprising idea that we have not expected in the context of taxing the digital economy. I will point right away at what is perhaps the most surprising element of this proposal: it has nothing to do with taxing value where it has been created, the mantra of BEPS".

However, brick-and-motor companies that are expanding into digital operations welcomed an opportunity to share concerns of a fair tax system that addresses the challenges of the digital economy because their operations are disadvantaged by higher taxes on having a physical presence.

Eric Anthoine, group tax director at Carrefour, said in his response to the OECD’s proposals that Carrefour is very much in favour of a disruption to tax policy in order to establish fair tax competition between sectors under the digital economy.

The summary of the G7 meeting states that new rules will be developed to address new business models, which create value with no physical presence. These rules also need to address mixed business models, such as Carrefour’s, which include digital and brick-and-motor operations.

Independent approaches

With the G7 meeting in France bringing together the US and French ministers, unilateral digital tax proposals did create a clash.

The US already pushed back on EU unilateral digital tax proposals because it believes the measures unfairly targeted US companies. Similar concerns have been raised over France’s 3% digital tax that received final approval from the French Senate on 11 July. The US has launched an investigation into the French rules.

However, French Finance Minister Bruno Le Maire said that the French digital tax would be withdrawn as soon as an international alternative was negotiated through the OECD, which is not expected before 2020.

"I am ready to wait, but not for eternity," said Le Maire. "I really hope we will be able to pave the way for a compromise at the G7 level on the question of digital taxation," he added.

"Inconsistent independent approaches to taxation and trade wars are in the interest of neither governments nor taxpayers, whether the corporations or the individual citizenry of impacted countries are involved," said Tim Wach, managing director of Taxand.

Any unilateral measure is "fraught with difficulties", Wach said, pointing out that the lines between those activities to be taxed and those that are not are "impossible to draw with precision", making them "complex to administer and comply with, while opening them up to abuse".

Wach commended the G7 finance ministers for recognising this difficulty, although he doesn’t believe a global minimum tax is the ideal answer.

"While minimum taxes are generally an indicator of weaknesses in a tax system, and it is generally better to address those weaknesses than to adopt a minimum tax, we would agree that taking the minimum tax approach is preferable to an inherently inefficient and unfair sector targeted tax like a digital tax, particularly one that is inconsistent as between different countries," Wach said.

Rates of a minimum global tax are still being discussed and have not been confirmed because the UK is hesitant given the government changes happening later in 2019.

"The G7 looks forward to further progress in the context of the G20 and a global agreement on the outlines of the architecture by January 2020 at the level of the Inclusive Framework on BEPS," the chair’s summary concluded.

The above article was published on on 19 July 2019 and has been republished with the approval of the Publisher.

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