ARTICLE13 July 2021

The global tax map is redrawn - G20 countries reach agreement on digital tax and global minimum tax

G20 countries have agreed to endorse OECD:s outline plan for taxing the digital economy and a minimum global corporate tax rate. A finalised plan is due to be presented in October. However, the proposals deviate dramatically from current international principles and many obstacles remain to be resolved before it can be applied, writes Claes Hammarstedt, an expert on international taxes. 

Photo: Most Photos, Svenskt Näringsliv

Although temporarily postponed, the EU still intends to present its own proposal for a digital tax, several EU countries oppose the proposals, and the Biden administration must also convince the US Congress to endorse the proposals. Complex indeed; however, one thing is clear; if the proposals go ahead, the international tax system will not get any simpler.

At their meeting 9-10 July, the G20 countries agreed to   endorse the outline plan, presented by the OECD on 1 July, for taxing the digital economy (Pillar 1) and for introducing a global minimum tax (Pillar 2). Of the 139 countries that took part in the negotiations with the OECD, to date 132 have expressed their support for the outline. Ireland, Hungary and Estonia are among the holdout countries that have not joined the deal.

Pillar 1 is based on changing corporate tax rules in order that part of the profits are deemed to have arisen in the country of sale, rather than where production and headquarters are located. The proposal is initially intended to affect only the 100 or so largest and most profitable companies, and follows a suggestion from the US earlier this year. For companies with a global turnover of more than ‚ā¨20 billion and a profit margin of more than 10%, 20-30% of the part of the profits exceeding 10% (i.e. excess profits) would be taxed in the countries where the company made its sales. However, the outline flags up the possibility that the turnover threshold could be lowered from ‚ā¨20 billion to ‚ā¨10 billion after an initial seven-year trial period.

The outline also states that all unilateral digital taxes will be eliminated as part of the implementation of Pillar 1. Pillar 2 proposes a global minimum tax of at least 15% for companies with a turnover of more than ‚ā¨750 million. Both proposals are proposed to apply from 2023.

Since the financial crisis of 2007, the international battle for tax bases has significantly intensified. Digitalisation has taken off, enabling companies to operate in markets without requiring a physical presence. Under intense political pressure, the OECD has been working since 2013 to develop a global system that can address the tax challenges posed by this accelerating digitalisation of the economy.

Convincing 139 countries with widely differing prerequisites and expectations to agree on a common set of rules is obviously not an easy task. Moreover, the two proposals deviate dramatically from current international principles. The proposal to equalise the distribution of corporate tax revenues between production and market jurisdictions obviously does not benefit small, open and export-dependent economies such as Sweden’s.

Although the proposal to allocate profits to market jurisdictions may not initially affect Swedish companies to any significant extent, it is worrying that the outline indicates that thresholds may be lowered dramatically after only seven years. If this becomes the case, many Swedish businesses are likely to fall into the complex regulatory framework. For the companies concerned, this will mean increased costs and the risk of tax disputes, while Sweden risks becoming a major loser when tens of billions of kronor in corporate tax revenues instead end up in those countries where Swedish companies have their sales.

As for the global minimum tax, proponents argue that it is necessary to stop the race to the bottom with respect to corporate tax rates, and that it would contribute to a fairer distribution of tax revenues. The claims that the corporate tax rate is heading towards zero are greatly exaggerated. In fact, the race has been more towards the middle, i.e. around 20%.

A global 15% minimum tax will not necessarily pose a problem for a country like Sweden, with a current corporate tax rate of 20.6%. At the same time, however, the proposal represents a major restriction on the sovereignty of nations and their ability to shape their tax policies according to what is best for their own country. Large market countries have a natural appeal for investments and therefore do not have the same need to compete through a lower corporate tax rate. By way of contrast, countries with smaller markets and/or poor infrastructure may be more dependent on being able to offer a lower corporate tax rate as a way of attracting investments. Against this background, it is difficult to see how a global minimum tax would lead to a fairer distribution of tax revenues.

Work on the protracted negotiations is now entering its final stages, with a number of outstanding issues and details remaining. A finalised negotiated proposal, together with a detailed implementation plan, is expected to be presented at the G20 meeting in October this year.

Whether this optimistic time-plan is successful remains to be seen. Around the corner lurks a renewed trade conflict between the EU and the US. The European Commission had previously announced that it would present its own proposal for a digital levy only a few days after the G20 July meeting. The fact that the EU is negotiating a global solution while at the same time planning to introduce its own digital fee/tax has angered the US. After intense pressure from the US administration, the Commission decided to postpone their own proposal for now, in order for the global negotiations to be concluded. Should the Commission proceed with its digital levy before the global tax agreement is fully implemented it may very well derail the finalization of a global solution. In addition to the controversies with the EU, for the agreement to have any real impact, the Biden administration will need to convince the US Congress to back the proposals.

Despite all the turmoil and uncertainty, one thing is certain. The international tax system is not likely to get easier any time soon.

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Publisher and editor-in-chief Anna Dalqvist