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
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:
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.
minimum tax rate that ensures multinationals pay at least 15% tax on a
country by country basis.
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
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This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.