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This week in tax: Opposing demands pressure G7 deal

Sunak cuts fuel duty, but avoids the bigger picture

The G7 has agreed on a global minimum corporate tax rate, but opposing demands from different countries and special interest groups are already putting pressure on the deal.

The UK signed up to the minimum rate a week ago, yet the British government is trying to negotiate an exemption for the City of London financial sector. Many other governments would like to secure convenient exceptions as well, but this could defeat the purpose of a global minimum rate.

“There is an assumption by a number of countries that there would be an exception for financial services. The question is now how you manage these exceptions without all the complexities they bring,” said Chris Sanger, global government and risk tax leader at EY.

Although the G7 nations have an agreement in principle, a global minimum tax is far from a done deal. G20 leaders are going over the details ahead of the July meeting in Venice, and they will have to finalise crucial parts of the agreement before it can proceed.

Winning over Brazil, China, and India will then be the next step before the OECD can finally settle an agreement by October. This should be the last hurdle in the mission to solve taxing the digital economy. Pillar two is slowly gaining support, but there is still a lot of uncertainty about pillar one.

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G7 minimum tax agreement is a step towards a global consensus


Pillar two could put Arab Gulf states at a disadvantage

Following the G7 agreement on a global minimum corporate tax rate, tax directors suggest Gulf Cooperation Council (GCC) countries face significant tax outflows under pillar two because of limited domestic corporate tax regimes.

Many taxpayers have long speculated that the United Arab Emirates and neighbouring GCC countries will introduce corporate tax regimes in the near-term because of depressed energy prices from the COVID-19 pandemic.

The agreement between the G7 finance ministers on a global minimum corporate tax rate of at least 15% under the OECD’s pillar two proposal on June 5 puts pressure on many GCC countries to broaden their tax bases by introducing corporate income taxes to protect against tax outflows.

“There is the argument that the establishment of a minimum level of corporate income tax in no or only nominal tax jurisdictions [such as the UAE] would raise tax collections for those jurisdictions,” said Shiv Mahalingham, transfer pricing and BEPS expert at the Cragus Group.

“If MENA [Middle East and North Africa] jurisdictions do not introduce a minimum level of taxation, tax collections would flow to other jurisdictions,” added Mahalingham.

However, some campaigners and academics view a floor on the global minimum corporate tax rate as an infringement on the tax sovereignty of smaller jurisdictions, including the GCC countries. This is because these countries need a rate of at least 15% to protect against tax outflows.

Read the full article here

ATAF makes the case for African taxing rights

The African Tax Administration Forum (ATAF) is seeking to increase the taxing rights of African jurisdictions by simplifying the OECD’s pillar one blueprint and creating a level playing field when determining how multinationals’ profits are calculated.

The alternative proposal suggested by ATAF to the Inclusive Framework will ensure that a single revenue threshold for economies designed by the OECD does not discriminate against smaller economies.

Widening the scope of businesses taxed and lowering the global revenue threshold – along with further simplicity – could generate further revenue for developing countries and redress imbalances in the reallocation of profits.

One of the key issues addressed by ATAF includes the reallocation of profits as it deems the OECD's current calculation discriminates against smaller economies.

“In ATAF’s view, unless the concerns of developing countries regarding the current balance in the allocation of taxing rights between source and residence countries is addressed in the pillar one rules, then the rules will not be a long-term sustainable solution and will not stabilise the global tax rules and build future tax cooperation,” said Mary Baine, director of tax programmes at ATAF.

ATAF deems taxing rights of African jurisdictions must be increased through a simplified approach that addresses the tax challenges arising from the digitalisation of the economy and results in an appropriate reallocation of profits, reducing inequality between economies.

Read the full article here

Next week in ITR

ITR will be revisiting trends in tax technology. Taxpayers are turning to automation to catch errors in reporting as they face growing demands for transparency.

Readers can also expect an update on Indian GST policy on COVID-19 vaccines. The Indian government has been trying to avoid granting a full GST waiver for the vaccines despite the severity of the second wave of COVID-19 that is hitting the country.

At the same time, the Biden administration is looking to use global information exchange to crack down on tax avoidance and evasion through crypto-assets. The US may be setting a bold precedent for other countries to follow.

Meanwhile, the OECD is working to settle the details of pillar one before the G7 can back it. The G7 agreement on pillar two is already facing backlash from African nations and the financial services sector. The weeks ahead will be crucial.

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