Though the European Union might not like a ‘side-by-side’ global minimum tax system, it has little choice but to work with it for now.
The G7 countries on 28 June reached a compromise on the global minimum corporate tax. The United States under President Trump had said it would withdraw from the international deal that provided for the tax, brokered in 2021 by the Organisation for Economic Co-operation and Development, and would levy a ‘revenge tax’ on countries applying the global minimum to US companies. The G7 agreement removes that threat for now, but at the price of a ‘side-by-side’ system in which US companies will be to some extent protected.
The agreement could be seen as a defeat for Europe and other G7 countries, which have conceded a carve out for American businesses. This concession rewards threats by the US and does not send a signal of power at a time when Europe and other economies face challenges from the US. However, it may contradict the expectations of those who thought the minimum tax would not survive President Trump’s second term.
The G7 has emphasised that the agreement should not create opportunities for base erosion and profit shifting. This means that the US will support other OECD countries in their strict implementation of the rules relating to the minimum tax. In a sense, the minimum tax, which could have unfolded with US withdrawal, can be seen now as preserved, including by the US. ‘Don’t tax me, and I will make sure all the others are properly taxed’, could be the summary of the agreement.
Is the US carve-out a serious competitiveness issue? In fact, the US introduced the first minimum tax (Global Intangible Low Tax Income, GILTI) in 2017, under the first Trump administration. US companies are therefore already taxed on undertaxed profits declared abroad. However, GILTI is implemented when the average effective tax rate abroad is below 10.5%, unlike the OECD minimum tax which is computed on a country-by-country basis and at a 15% rate. The difference is significant, but it is true that GILTI technical computation rules make it more stringent than the global minimum tax, and that the Senate is proposing to move the rate up to 14%.
However, US companies may have profits taxed below 15% in the US. By applying the minimum tax’s Under Taxed Profit Rule (UTPR), other countries could in principle top up those taxes, but this has been neutralised by the G7 agreement, thus potentially giving US companies a competitive advantage. The real risk would be that companies shift their headquarters to the US to benefit from lower taxation. This risk seems limited as the US is not (yet) a tax haven, but should be monitored closely by US partners.
As the global minimum tax was initially endorsed by the G20 and more than 140 countries in 2021, a G7 agreement to change the rules signals that the G20 is in second place. Even though the G7 agreement recognises that further work on the understanding of the principles will be needed in the OECD Inclusive Framework on BEPS, the dynamic of inclusivity of the tax work there has been undermined. China, which has not implemented the global minimum tax, may be reluctant to endorse a deal that provides a free pass to the US (though Chinese companies already benefit from massive exemptions).
The EU, meanwhile, will need a directive to implement the new side-by-side system. Unanimity should be reached easily because France, Germany and Italy, the EU hardliners on the minimum tax, are G7 members. European countries may take the view that the G7 agreement secures the minimum tax globally, even at the cost of a US carve out.
Interestingly, a vague G7 promise to resume 'constructive' discussions on the taxation of the digital economy (the second part of the OECD global tax agreement) leaves unresolved the conflict between the US and other countries, including France and Italy, on digital services taxes. The decision by Canada to remove its digital services tax two days after announcing it would be implemented is a good illustration of the continuing instability of international tax negotiations.
Republished with permission from Bruegel. All views expressed above are the author's own.
Home >Articles > The implications of G7 agreement on the global minimum tax
The implications of G7 agreement on the global minimum tax
Though the European Union might not like a ‘side-by-side’ global minimum tax system, it has little choice but to work with it for now.
The G7 countries on 28 June reached a compromise on the global minimum corporate tax. The United States under President Trump had said it would withdraw from the international deal that provided for the tax, brokered in 2021 by the Organisation for Economic Co-operation and Development, and would levy a ‘revenge tax’ on countries applying the global minimum to US companies. The G7 agreement removes that threat for now, but at the price of a ‘side-by-side’ system in which US companies will be to some extent protected.
The agreement could be seen as a defeat for Europe and other G7 countries, which have conceded a carve out for American businesses. This concession rewards threats by the US and does not send a signal of power at a time when Europe and other economies face challenges from the US. However, it may contradict the expectations of those who thought the minimum tax would not survive President Trump’s second term.
The G7 has emphasised that the agreement should not create opportunities for base erosion and profit shifting. This means that the US will support other OECD countries in their strict implementation of the rules relating to the minimum tax. In a sense, the minimum tax, which could have unfolded with US withdrawal, can be seen now as preserved, including by the US. ‘Don’t tax me, and I will make sure all the others are properly taxed’, could be the summary of the agreement.
Is the US carve-out a serious competitiveness issue? In fact, the US introduced the first minimum tax (Global Intangible Low Tax Income, GILTI) in 2017, under the first Trump administration. US companies are therefore already taxed on undertaxed profits declared abroad. However, GILTI is implemented when the average effective tax rate abroad is below 10.5%, unlike the OECD minimum tax which is computed on a country-by-country basis and at a 15% rate. The difference is significant, but it is true that GILTI technical computation rules make it more stringent than the global minimum tax, and that the Senate is proposing to move the rate up to 14%.
However, US companies may have profits taxed below 15% in the US. By applying the minimum tax’s Under Taxed Profit Rule (UTPR), other countries could in principle top up those taxes, but this has been neutralised by the G7 agreement, thus potentially giving US companies a competitive advantage. The real risk would be that companies shift their headquarters to the US to benefit from lower taxation. This risk seems limited as the US is not (yet) a tax haven, but should be monitored closely by US partners.
As the global minimum tax was initially endorsed by the G20 and more than 140 countries in 2021, a G7 agreement to change the rules signals that the G20 is in second place. Even though the G7 agreement recognises that further work on the understanding of the principles will be needed in the OECD Inclusive Framework on BEPS, the dynamic of inclusivity of the tax work there has been undermined. China, which has not implemented the global minimum tax, may be reluctant to endorse a deal that provides a free pass to the US (though Chinese companies already benefit from massive exemptions).
The EU, meanwhile, will need a directive to implement the new side-by-side system. Unanimity should be reached easily because France, Germany and Italy, the EU hardliners on the minimum tax, are G7 members. European countries may take the view that the G7 agreement secures the minimum tax globally, even at the cost of a US carve out.
Interestingly, a vague G7 promise to resume 'constructive' discussions on the taxation of the digital economy (the second part of the OECD global tax agreement) leaves unresolved the conflict between the US and other countries, including France and Italy, on digital services taxes. The decision by Canada to remove its digital services tax two days after announcing it would be implemented is a good illustration of the continuing instability of international tax negotiations.
Republished with permission from Bruegel. All views expressed above are the author's own.
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