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This week in tax: G20 moves towards a global tax reform

OECD releases long-awaited model rules for pillar two on GloBE system

The chances of international tax reform got a boost this week when G20 finance ministers moved towards a global minimum corporate tax rate after the US declared its support for the proposal.

The Biden administration has set out a Made in America tax plan to realign the US fiscal system with OECD efforts to solve the question of digital tax. This could be the moment that finally settles the roadmap for international tax reform.

The Made in America tax plan will raise the US corporate tax rate from 21% to 28% and increase the global intangible low-taxed income (GILTI) rate from 10.5% to 21%. This is a dramatic turn for US fiscal policy which could promote an international shift.

US business leaders have been quick to respond to the plan. "We recognize investment will require concessions from all sides, we're supportive of a rise in the corporate tax rate," said Jeff Bezos, founder and CEO of Amazon, in a statement regarding the Biden administration's tax plan.

Bezos added: "we look forward to Congress and the Biden administration coming together to find the right balanced solution that maintains US competitiveness".

So far, France and Germany have signalled that they will support the US approach. It will be difficult to get countries with opposing interests behind a solution, but US support could make or break a multilateral framework.

Despite the COVID-19 pandemic, the OECD aims to settle the digital tax question in July, and US support will be crucial to solving the problems of taxing online businesses. This could be the breakthrough that policymakers have been waiting for.

ITR’s top articles this week:

The Made in America tax plan is rewriting the TCJA

Top indirect tax disputes for Q1 2021

OECD tax report for G20 foregrounds environmental and digital tax

Carbon taxes to become the new normal

Argentina’s wealth tax falls short

The Fernández government’s one-off wealth tax has raised ARS $6 billion ($65 million) in tax revenue, just 2% of the revenue it was expected to generate. Yet the deadline for wealth tax payments is April 16.

President Alberto Fernández introduced the wealth tax in December 2020 as part of efforts to raise more tax revenue to cover the costs of the public health response to COVID-19. It was designed as a one-off levy to tax owners of assets worth more than ARS $200 million in a bid to raise ARS $300 billion.

An estimated 13,000 people are expected to pay the wealth tax. The wealth tax rate ranges from 2.25% to 3.5% in Argentina, while citizens living abroad could pay as much as 5.25%.

Although the wealth tax is a far off target, the Fernández government has seen its revenue from other taxes increase, which suggests that resources dedicated to administering the wealth tax could be better allocated elsewhere.

Wealth taxes have been debated all over the world since the pandemic forced governments to increase spending to mitigate lockdowns and recessions.

Meanwhile, carbon taxes are also receiving a lot of attention from policymakers, some advisors said it will be a standard policy amid multilateral efforts towards a green economic recovery.

OECD makes the case for carbon taxes

The G20 has a lot more to consider than just digital tax, and no issue is more fundamental than climate change. The report from the OECD Secretary-General Gurría released on April 7 urged the G20 finance ministers to consider urgent tax reform.

The report makes the case for phasing out fossil fuel subsidies that distort price markets and hamper efforts to drive down carbon emissions through mechanisms like emissions trading schemes (ETS) and carbon taxes.

COVID-19 offers a unique opportunity for a green economic recovery, but misguided subsidies are sabotaging progress. “Fossil fuel subsidies continue to reduce the price of carbon, potentially undermining work undertaken on pricing through tax or trading systems,” said Gurría.

Despite many governments committing to phase out inefficient fossil fuel subsidies over the medium term in 2009, total support for fossil fuels rose by 5% year-on-year to reach $178 billion in 2019. This marked a reversal of a previous five-year downwards trend.

The OECD is keen to support governments to reduce fossil fuel subsidies, and its report OECD Companion to the Inventory of Support Measures for Fossil Fuels 2021, released in March, offers governments a sequential framework to address the issue.

Taxpayers in the energy industry could see the effects of this advice in the coming years as the OECD works on carbon pricing guidance, and international discussions continue around carbon border adjustments and a global carbon floor price.

Next week in ITR

Next week, ITR will be following up on our coverage of the top indirect tax disputes with an overview of the most significant direct tax and transfer pricing disputes in 2021 so far.

Readers can also expect the publication of ITR’s spring magazine. The cover feature will showcase the results of our survey on the tax impact of COVID-19 and the lessons that businesses can draw from crisis management.

At the same time, the team will be reporting on how US production tax credits can be used to promote green growth. This may be a model for other governments to take up, to boost investment in renewable energy.

Finally, ITR will take an in-depth look at the trajectory of US tax diplomacy. President Joe Biden has demonstrated a significant departure from his predecessor’s administration, but plans for an international agreement could still be scuppered.

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