A G-7 deal on a global minimum tax for businesses faces hurdles

An agreement by rich countries to impose minimum taxes on multinational companies faces a difficult road to implementation, and many governments are likely to wait and see what others, especially a divided US Congress, will do.

Treasury Secretary Janet Yellen praised the deal, reached by finance ministers from major Group of Seven nations over the weekend in London. He called it a return to multilateralism and a sign that countries can adjust the tax network of profitable companies to fund their governments.

The deal represents a turning point in long-running negotiations about where and how corporate profits should be taxed. The deal would impose a minimum tax of at least 15% and give countries more authority to tax the profits of digital companies like Apple Inc. and Facebook. INC.

that dominate global markets but pay relatively little tax in many countries where they operate.

While the impact on technology companies remains uncertain, some welcomed the prospect of a more uniform global regime. Nick Clegg, vice president of global affairs for Facebook Inc., said on Twitter that the agreement is a “step towards certainty for businesses” when it comes to taxes.

Further tests will be conducted in the coming months, as the details become clear and governments see which country goes first. Those who move ahead of others could hurt their income bases and businesses, tax experts say, and those who lag behind a global consensus could also be hurt.

“While we may see an agreement, then it is potentially 18 months or more to incorporate it into the national legislation of each of the countries,” said Monika Loving, national practice leader for international tax services at the BDO advisory firm. “In terms of revenue impact, we may have two years to go before tax administrations collect additional revenue.”

In the spotlight, some tax specialists, lawyers and officials said, is the US Congress.

In countries with parliamentary systems, governments can quickly deliver on their promises, turning them into local laws and regulations. In the United States, however, a slim Democratic majority in the House, an evenly divided Senate, anti-post Republicans, and procedural hurdles complicate passage.

Other countries may be reluctant to change their laws or eliminate taxes that affect US-based tech companies without Congress acting first.

US lawmakers may be the other way around, wary of raising taxes or handing over tax authority to other nations without guarantees of a comprehensive global deal. If the United States increases taxes and others do not, there could be disadvantages to having a corporate headquarters in the United States.

Democrats can pass some changes on their own, but they have differences with each other on fiscal policy. The Biden administration has also called for the corporate tax rate to be raised to 28% from 21% and for the minimum tax for US-based companies to be set at 21% to fund other initiatives. And some Democrats have resisted those higher rates.

Republican votes may be needed if countries’ minimum tax changes require renegotiation of tax treaties, which require a two-thirds vote in the Senate for ratification.

The top tax-drafting Republicans in Congress, Rep. Kevin Brady of Texas and Sen. Mike Crapo of Idaho, noted that the US already imposed a 10.5% form of minimum tax in 2017 and other countries have not. they have followed it.

“We continue to warn against moving forward in a way that could negatively affect American businesses and ultimately harm American workers and jobs at a critical time in our country’s economic recovery,” they said.

The G-7, which comprises Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, agreed that companies must pay a minimum tax rate of at least 15% in each of the countries in which they operate.

They also agreed to new rules that change which countries can tax what income in an increasingly digital economy. Those new rules will target large global companies that have a profit margin of at least 10%. The right to tax 20% of profits above that threshold would be shared between governments.

The deal faces an initial test in the Group of 20 major economies, which includes the entire G-7 and a number of large developing countries such as China, India, Brazil and South Africa. The G-20 finance ministers will meet in Venice in early July and a review of global fiscal rules is on the agenda.

Acceptance will also need to come from a broader group of 135 countries in what is known as the Inclusive Framework. Some countries with very low tax rates, like Ireland, with a 12.5% ​​tax on earnings, are reluctant to sign up. The United States has proposed tax changes that would penalize companies from countries that do not impose minimum taxes.

“We will have to convince the other great powers, especially the Asian ones. I’m thinking in particular of China, ”French Finance Minister Bruno Le Maire said in a television interview this weekend. “Let’s face it, it’s going to be a tough fight. I am optimistic that we will win it because the G-7 is giving us extremely powerful political momentum. “

While the G-7 members agreed on the general lines of a new regulation, they also left some unfinished business.

Several countries in Europe raised the stakes on the long-running talks by announcing separate national levies on digital companies, in the hope that they would pressure the US for an international deal. In retaliation for what it saw as discrimination against US companies, the United States announced punitive tariffs on imports from those countries, although it suspended those tariffs until the end of this year.

The G-7 did not agree on a timeline for removing those levies, a sign that decision makers are unsure exactly when the new tax rules might come into play. In their final statement on Saturday after two days of meetings, the G-7 ministers said they would work on a path to remove the levies that will be tied to the new rules that take effect.

The broader changes, if enacted, would affect many of the world’s largest and most profitable companies, particularly in the technology sector. But removing taxes on digital services would be a ray of light for tech companies. They have long said they would prefer an international resolution on taxes that result in higher bills to a patchwork of national taxes.

Some tech executives have expressed concern that countries will try to hold on to their taxes on digital services even with a global deal on corporate taxes.

Matthew Schruers, president of the Computer & Communications Industry Association, which represents companies like Alphabet From Inc.

Google and Facebook Inc. applauded the G-7 deal on Saturday. However, he warned, “the job is not done until digital taxes that unfairly target American businesses are removed,” he said.

Many large technology companies, including Apple Inc., Alphabet and Facebook, in recent years have already reported effective tax rates roughly around the minimum rate of 15% proposed by the G-7, according to securities documents.

Companies that are below the rate, like Apple, could see a potential increase in their tax bill under the proposed agreement in a few years.

The technology company reported an effective global tax rate of 14.4% for the year ended September 26, 2020, citing lower tax rates on foreign earnings.

An Apple spokesman declined to comment.

Write to Richard Rubin at [email protected], Paul Hannon at [email protected], and Sam Schechner at [email protected]

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