G7 Nations to Set Minimum Global Corporate Tax Rate at 15%

By Bernhard Schwechel, FACT GmbH

The agreement builds on the twopillar approach outlined by the OECD and aims to tackle the challenges arising from an increasingly globalized and digital economy. Under Pillar One, the largest and most profitable multinational firms will be required to pay tax in the countries where they do business, rather than simply where the countries have headquarters or hold intangible property.

The Pillar Two proposals are most significant to the United States, given that global minimum taxation is a key priority for the US Administration. The US is expected to be the largest beneficiary under the Pillar Two proposals. International consensus on a global minimum corporate tax rate should assist in minimising any disadvantage caused by a future increase in the corporate tax rate in the US

Pillar One

Pillar One rules will apply to large global firms with at least a 10% profit margin. Under the rules, at least 20% of any profit above the 10% margin will be reallocated and then subjected to tax in the countries in which the firms derive sales or otherwise operate. The US has unilaterally opposed digital services taxes being introduced by other countries, given that such taxes target US technology companies which have a large market share in the EU and/or the UK. The United States recently announced retaliatory, suspended tariffs on goods from the UK and five other countries while broader international tax negotiations continue with respect to the way these countries impose digital services taxes. The OECD estimated in October 2020 that Pillar One proposals would lead to a 0.2% - 0.5% (USD 5 billion - USD 12 billion) increase in global corporate tax revenues.

Pillar Two

Multinationals will be required to pay a tax of at least 15% in each country in which they operate. The aim of these rules is to stop companies from shifting profits to low-tax jurisdictions on the basis that the country in which the company is headquartered is expected to be able to top up the corporate tax payments to the global minimum effective level. The OECD estimated in October 2020 that Pillar Two proposals would lead to a 1.6% - 2.8% (USD 42 billion - USD 70 billion) increase in global corporate tax revenues.

Published: International Taxation Newsletter, No. 15, Autumn 2021 l Photo: Evgenia - stock.adobe.com