The wealthiest countries in the world have paved the way for a revolution in corporate taxes, but significant efforts are still required to achieve this reform. Discussions in the coming weeks among over 100 governments will reference the outline of the agreement reached by the G7 finance ministers earlier this month ahead of the G20 meeting in July. Despite the breakthroughs made by the group regarding a global minimum corporate tax rate and a philosophical shift that allows a country to tax the profits of foreign corporations, numerous technical details remain unresolved. The agreement on which companies will be covered and determining how governments can continue to use tax incentives to encourage desired economic activities under the minimum rate are among many other challenges that have overshadowed years of discussions spearheaded by the OECD. Implementing any agreement could take years and would require local adjustments and legislation, and concerns about commitment from the parties could also hinder the deal. Pascal Saint-Amans, the official managing the OECD talks, stated to French television on June 14: "It’s a month where we’ve barely slept, the next two weeks will be extremely important."
**Defining the Scope**
The G7 agreement established principles for reallocating some profits from the home countries of corporations for taxation in the countries where sales occur. However, defining precisely which companies will be included—those said to be "in-scope"—remains a challenge. The proposal from the Biden administration last April aimed to use revenue and profitability metrics to narrow the list to around 100 companies, successfully disrupting the conflict over more qualitative standards or avoiding differential treatment of tech companies, but countries still need to reach a final agreement on the boundaries that define the companies meeting the qualification criteria. According to a policy memo sent to other governments last month, the 24-country intergovernmental group, which includes Brazil, India, and South Africa, seeks to gradually expand the scope to include over 100 companies. Countries must also decide how much of the tax revenue should be shared after the G7 agreed to reallocate "at least 20%" of profits above a 10% margin. Developing economies want the highest possible taxes from the tax income on multinational corporations operating within their territories.
**Important Meeting Dates to Discuss "Global Taxes":**
- June 30 - July 1: Talks hosted by the OECD
- July 9-10: G20 Finance Ministers meeting in Venice
- October 15-16: G20 Finance Ministers meeting in Washington
- October 30-31: G20 Leaders meeting in Rome
Negotiators are also reconsidering the controversial qualitative standards to keep Amazon, with its low margins, within scope by separating its profitable business lines. Companies have complained that such segregation could be overly complex, especially if they report their finances differently. If financial services are excluded from the deal as expected, this represents another challenge, as drawing a clear line between these and tech companies is becoming more difficult.
**Minimum Tax Rate**
The so-called Pillar Two of the talks will create a global minimum corporate tax rate, seen as an opportunity to boost government revenues, a priority for the U.S. with broader support elsewhere. The OECD estimates that as much as $150 billion could be generated annually from the U.S.'s stricter laws on foreign income and a global minimum rate of 15%. This will be difficult for Ireland, which has a corporate tax rate of 12.5%. Additionally, some countries, including China, want exemptions in the laws that allow them to attract advanced technology investments with tax incentives. David Linke, KPMG's Global Head of Tax and Legal, stated, "The minimum tax is about transferring part of tax sovereignty, and how do you maintain specialized incentives for a certain type of foreign investment... It's a tough issue."
**Digital Dilemma**
An OECD deal could eliminate a significant number of tariffs primarily imposed on U.S. tech companies, which countries have enacted unilaterally in recent years, prompting threats of retaliation from the U.S. To rebuild trust, negotiators must agree on which measures will be revoked and when this will happen. Countries are reluctant to repeal such taxes until they obtain additional revenues from the OECD agreement, and involving developing economies may be particularly challenging as they may not benefit significantly from this process. Mari Luo, Director of the Group of 24, stated, "Each country will have to balance the cost and benefit particularly because it will be asked to forgo unilateral tax actions."
