At the meeting held in London on June 4 and 5, the Finance Ministers of the G7 countries reached an important agreement on a number of crucial tax reform measures regarding corporate taxation, which have been the subject of discussion for years in the context of the OECD/G20 Inclusive Framework on BEPS (Base Erosion and Profit Shifting).
The OECD/G20 Inclusive Framework on BEPS is a project developed by the Organization for International Cooperation and Development, in collaboration with the G20, in order to combat tax avoidance for which many multinational companies are responsible - which causes enormous losses to national coffers every year. Through base erosion and profit shifting (BEPS) strategies, which exploit the inconsistencies between the tax systems in force in each country and their weaknesses, many multinationals manage to avoid taxation. This generates losses that the OECD estimates at 100-240 billion dollars annually (at a global level), equal to 4-10% of tax revenues from corporate income taxation.
The OECD/G20 Inclusive Framework was established in 2016 and represents the evolution of the OECD/G20 BEPS Project. The latter, launched in 2013, led in 2015 to the inauguration of a package of 15 actions aimed at combating tax avoidance (BEPS Package), that the 60 countries then participating in the Project committed to implement. The OECD/G20 Inclusive Framework on BEPS now involves 139 countries, which since 2018 have been working together to identify consensual and long-term solutions to the tax challenges arising from the globalization and digitization of the economy. The work conducted in this regard within the Inclusive Framework moves along two parallel (and equally important) tracks: identifying solutions to the issue of how to allocate the taxing rights of multinationals (the so-called first pillar) and introducing a global minimum rate, to be applied to the profits of the same multinationals (the second pillar).
The agreement reached by the Finance Ministers of Canada, France, Germany, Japan, Italy, the UK and the US, members of the G7, covers both pillars, despite the fact that media attention was mostly captured by the consensus reached around the introduction of a global minimum tax rate on corporate profits (the second pillar).
Regarding the allocation of taxation rights on the largest multinational companies (including but not limited to the digital giants Google, Facebook, Amazon etc.), in the final communiqué sent out on June 5, the ministers expressed their support for a solution whereby those with a profit margin above 10% would be taxed at least 20% on profits above the 10% threshold, in the countries where those profits were generated. This would mean, for companies that fall within the scope of this type of measure, being taxed wherever their profits are generated, i.e. in all the countries in which they sell their goods and services, regardless of whether they are established there to some extent. In short: more taxes to pay and in more countries, as acknowledged by Facebook's Vice President for Global Affairs and Communications Nick Clegg (who nevertheless said he hoped the proposal would succeed). This type of measure, in combination with the definition of a global minimum tax rate on profits, aims to discourage multinationals from setting up in those countries, known as tax havens, where corporate taxation is lower.
With regard to the second pillar of the international reform of company taxation, on which the OECD/G20 Inclusive Framework has been working for some time - the introduction of a global minimum tax rate on the profits of multinationals - the agreement reached between the Finance Ministers of the 7 largest (market) economies in the world envisages that this rate should amount to 15%. The agreement was facilitated above all by the willingness of the United States which, after years of opposition, has opened up to discussion.
However, one could say this is nothing more than a declaration of intent. In fact, it is not up to the G7 to decide on the matter, but many observers have interpreted the conclusion of an agreement in that forum as a first step towards the achievement of a broader consensus around the definition of a global minimum rate first within the G20 - which will meet in July in Venice - and then also among the remaining countries involved in the OECD/G20 Inclusive Framework on BEPS. Only in this way can the measures agreed in London, sooner or later, find real implementation. It is with this in mind that OECD Secretary General Mathias Cormann welcomed the agreement among the G7 countries and said: "There is still a lot of work to be done, but this decision gives an important impetus to the upcoming discussions involving the 139 member countries and jurisdictions of the OECD/G20 Inclusive Framework on BEPS, where we will persevere in the search for an agreement that ensures that multinational companies pay their fair share everywhere".
Nothing is guaranteed, however. In Europe, for example, there are bitter disagreements among the 27 member states on corporate taxation (and remember that tax policy remains a national competence, despite European-level coordination). Ireland, with corporate taxation at 12.5%, Cyprus and Hungary (9%), in particular, seem determined to strongly oppose the definition of a global minimum rate on profits of 15%. Even the US position is not yet completely certain: whatever agreement the Biden administration concludes at international level, it is up to Congress to ratify it and the mid-term elections - which could significantly modify its composition - are not so far away, being scheduled for November 2022.
The statement, more specifically, reads: “we commit to reaching an equitable solution on the 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”.