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This week in tax: European disharmony ahead of G20 tax summit

Tax professionals call for EU harmonisation and proportionate data use

Finance ministers and central bank governors from the G20 could strengthen or shatter the fragile G7 tax deal. Proponents of the 15% minimum tax rate must convince low-tax EU countries to agree.

While the G7 has agreed to a global minimum corporate tax rate of 15% under pillar two of the OECD’s proposal, there is a long way to go before the agreement is finalised at the G20 and OECD levels. If the G20 reaches an agreement, the world will be one step closer to the most dramatic tax reforms since the 1920s.

However, the EU – which as a group forms only one member of the G20 – is struggling to achieve a consensus within its own ranks. Irish Finance Minister Paschal Donohoe has vocally opposed a global rate, arguing that smaller countries need the option of a low tax rate to attract foreign investment.

Meanwhile, Ireland, Poland, and Hungary have said that they will not support a global minimum tax rate without exemptions to protect business activity in their countries.

Calls for specific sectors to be given special treatment have intensified in recent weeks. The UK’s proposal for its financial centre, the City of London, to be exempt from the global minimum rate is just one example. However, such a concession could introduce the possibility of more exemptions and undermine the minimum rate.

IMF Managing Director Kristalina Georgieva suggested that allowing exemptions would put the simplicity of the deal at risk. “Simplicity means the fewer deviations from a broad principle, the better,” she told the press.

“Let’s remember developing countries have less capacity to administer tax and anything that is more complicated, all the other things equal, would create risks of derailing the purpose of generating more revenues to invest in health, education, infrastructure and the green transition,” said Georgieva.

The hurdles facing pillar two don’t stop there, and the Chinese government is concerned about what the deal will mean for its special economic zones. The G20 meeting in Venice on 9-10 July will be yet another test for the OECD proposals.

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G7 leaders need to settle key details to secure pillar one plan

Chinese support crucial for G20 tax deal

The G7 agreement on global tax reform needs China’s vote at the upcoming G20 meeting for wider approval, but some finance ministers are already criticising the revised pillar one and pillar two proposals.

The G7 agreement features a 15% global minimum tax, a level of taxing rights for market jurisdictions, and an end to digital services taxes (DSTs). Some tax experts suggest the details in the agreement are designed to appeal to China ahead of the G20 meeting on July 9-10.

“It is a significant political signal that seven of the most politically powerful countries agree on the principles of tax reform, but it does not mean much unless China, India, and Brazil from the G20 are also on board,” said one head of tax based in Asia at a multinational bank.

The G7 agreement needs approval from China at the G20 meeting given its low-tax environment for technology companies and influence across the Asia-Pacific region to draw in a number of developing countries in the accord.

China is also protective of its technology sector and government representatives will likely aim to defend local concessions at the G20 meeting – particularly special economic zones – that lower the 25% corporate tax rate.

“China was always aligned with the US in resisting new taxes on large technology companies because of its large home-grown technology sector with Alibaba, Tencent and others,” said the head of tax.

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MNEs need to rethink TP before Libor ends

As the end of London Interbank Offered Rate (Libor) is approaching, multinationals should amend their TP policies and find a suitable alternative rate for their future financing.

Multinational enterprises (MNEs) should use the end of Libor as an opportunity to revise all their inter-company agreements when replacing the benchmark with a different base rate. Companies must also ensure the alternative risk-free rate (ARR) aligns with the arm’s-length principle (ALP) set by tax authorities.

“All multinationals have inter-company loan agreements. Some have inter-company derivative agreements as well. Although many of those are based on Libor – assuming that Libor will always be available, and now of course Libor isn’t,” said Graham Robinson, partner at PwC.

“You have an inter-company agreement and the loan is priced at Libor. You’ve got to come up with an alternative interest rate, and that’s a transfer pricing (TP) exercise,” said Robinson.

MNEs will need to choose which rate is most suitable and find a margin above that rate for it to become the inter-company loan price – a complex process to follow as new rates can be difficult to use.

In 2017, the Financial Conduct Authority (FCA) announced the cessation of Libor as it was no longer considered a reliable global benchmark due to the high risk of banks manipulating rates and therefore markets. In March, the UK regulator confirmed that all Libor setting would no longer be available after December 31.

This will apply in the case of all sterling, euro, Swiss franc and Japanese yen settings, as well as the one-week and two-month US dollar. The remaining US dollar setting will cease after June 30 2023.

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Next week in ITR

ITR will be looking into the glitches with the Indian Infosys tax portal, as the country’s Ministry of Finance gears up for a public meeting on the subject on June 22. Meanwhile, ITR will be analysing trends in patent box regimes worldwide.

At the same time, ITR’s Women in Tax Forum – Europe will be held on June 22-23 where everything from tax transparency to global transfer pricing developments will be discussed. Finally, readers can expect an in-depth look at diversity and inclusion as the world moves towards a post-pandemic environment.

These stories are just a sample of things to come.

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