The G7 has thrown its weight behind proposals to subject large multinationals to tax in countries where they do business and to a 15% global minimum tax rate.
If the larger group of countries that make up the G20 follow this lead then it is increasingly unlikely that a unilateral digital services tax (DST) will progress in New Zealand. The New Zealand Government has previously expressed a willingness to implement such a tax if international consensus is not reached or takes too long.
The G7, which comprises some of the world’s wealthiest nations, the United States, the United Kingdom, Canada, Japan, Germany, France and Italy, announced on 5 June 2021 that it had agreed to support:
A requirement for multinationals to pay tax in countries where they operate, not just where they have their headquarters. More specifically, multinationals with a profit margin of at least 10% would see 20% of their profit above that margin reallocated and subject to tax in the countries in which they operate.
A global minimum tax rate that ensures multinationals pay at least 15% tax on a country by country basis.
These announcements relate to two proposals, known as BEPS (Base Erosion and Profit Shifting) “Pillar One” and “Pillar Two” respectively, which have been developed by the OECD “Inclusive Framework” – a body comprising 135 members from the OECD and G20 – and have been in the pipeline for some time now.
The Pillar One proposal is intended to counteract a perceived unfairness arising from multinationals that may generate significant revenues from sales in a given country, but pay comparatively low amounts of tax in that country.
Pillar Two is intended to prevent a “race to the bottom” in corporate tax rates where countries lower their corporate tax rates in order to attract multinationals to either transfer their headquarters or lucrative intellectual property assets to such countries.
The G7 announcements are thin on details. If the brief statements provided by the G7 are compared with the “Blueprints” for Pillar One and Pillar Two published by the OECD Inclusive Framework, the following observations can be made:
The G7 announcement makes no specific mention of size thresholds, but indicates that the Pillar One proposal would apply to the “largest and most profitable” multinationals. The Blueprint for Pillar One uses a fixed size threshold of €750m of consolidated gross revenue.
The G7 announcement indicates that a reallocation of residual profits will apply to multinationals with a profit margin of at least 10%. The Blueprint for Pillar One limited the profit allocation rule (known as “Amount A”) to “Automated Digital Services” and “Consumer Facing Businesses”. While not clear, the proposal outlined in the G7 announcement could be significantly broader, and apply to multinationals that had considered themselves out of scope (e.g. natural resources businesses).
The Blueprint for Pillar One included a proposal to tax a further amount beyond an allocation of residual profit – known as “Amount B”. It is not clear if the G7 proposal contemplates Amount B.
The Blueprint for Pillar Two stopped short of specifying the rate of global minimum tax. The G7 announcement provides an indication of what that rate may be – 15%. The rate is arguably surprisingly low, and the USA has been pushing for a rate of 21%.
What happens next?
The Pillar One and Pillar Two proposals will be put to a meeting of the G20 Finance Ministers and Central Bank Governors in July this year for consideration.
A number of jurisdictions, including the UK, have introduced DSTs, which are intended to achieve broadly the same outcome as BEPS Pillar One. In their announcement, the G7 nations agreed on the need for appropriate coordination between the application of BEPS Pillar One and the removal of all DSTs.
The New Zealand Government has previously indicated it would introduce a DST if progress on Pillar One did not move swiftly enough. In light of the G7 announcement, and depending on the outcome of the G20 meeting in July, it is looking increasingly that New Zealand’s DST proposal may need to be abandoned.