The release of the Pillar One and Pillar Two “blueprints” in October 2020, and the recent G7 (June 2021) and G20 (July 2021) meetings, provided an opportunity for further progress to be made on the Pillar One and Pillar Two proposals, which we have covered in past editions of BrassTax.

While the Inclusive Framework had previously targeted a consensus solution to be reached by the end of 2020, the impact of Covid-19 (arguably more profound and more prolonged than initially anticipated) has adversely affected this timeframe. Covid-19 has, however, provided a new lens through which national and supra-national tax authorities view the imperative for international tax reform and the challenge of greater public deficits.

G7 Developments

The G7 meeting in June 2021 resulted in an endorsement of key elements of Pillar One and Pillar Two. In particular, and in respect of Pillar One, the G7 committed to taxing the largest and most profitable multinational firms on at least 20% of the profit exceeding a 10% margin. In respect of Pillar Two, the G7 reached an agreement on the global minimum corporation tax rate (to be operated on a country-by-country basis) of 15%. The G7 also committed to the removal of all Digital Services Taxes (DSTs), and other relevant similar measures. While the removal of DSTs was not unexpected in light of the position taken by the United States in response to the United Kingdom’s and France’s DSTs, it remains to be seen what “other relevant similar measures” will include – and whether such measures could extend to the United Kingdom’s diverted profits tax.

The position reached by the G7 was further advanced at the subsequent G20 meeting. Of note is the fact that a small but significant number of countries have not agreed to the G20 position. Originally, the G20 proposal was agreed to by 130 out of 139 countries. Ireland, Hungary, Estonia, Barbados, Kenya, Nigeria, Sri Lanka, Peru, and St. Vincent and the Grenadines initially dissented but have subsequently signed up to the G20 agreement.

G20 Developments

The G20 statement provided further detail around the allocation of “Amount A” (the portion of residual profit of in-scope businesses) by providing that in-scope businesses would be multinational enterprises with a turnover above €20 billion, and with profitability above 10%. The turnover threshold will be reviewed seven years after the introduction of the measures with a view to this being reduced to €10 billion if implementation has been successful. This approach abandons the focus on automated digital services businesses and consumer-facing business. However, extractive industries and regulated financial services are to be excluded. Also under Amount A, it has been agreed that the nexus rules permitting allocation of Amount A to a market jurisdiction will require the derivation of at least €1 million in revenue, or €250,000 of revenue where a country’s gross domestic product is less than €40 billion. As regards the allocation of Amount A, this is expected to be 20-30% of the profit in excess of 10% of revenue. A multilateral instrument through which Amount A is implemented will be developed and opened for signature in 2022, with Amount A coming into effect in 2023.

“Amount B” was also lightly addressed by the G20 statement, which provided that the application of the arm’s-length principle to in-country baseline marketing and distribution activities will be simplified and streamlined, with such work being completed by the end of 2022.

The G20 statement also provided further detail on the Pillar Two proposal, including that the Global Anti-Base Erosion Rules (GloBE Rules) have the status of a “common approach.” This effectively means that Inclusive Framework members: (i) are not required to adopt the GloBE Rules (although countries that do must do so in a way that is consistent with the outcomes provided for under Pillar Two); and (ii) are required to accept the application of the GloBE Rules applied by other Inclusive Framework members. Further work in respect of Pillar Two is also expected to be released in an implementation plan, with Pillar Two taking effect in 2023.

Observations

Notwithstanding that considerable progress has been made in agreeing some of the key aspects of Pillar One and Pillar Two, there are still a number of key details and implementation issues that will need to be addressed before the effect of Pillar One and Pillar Two is seen in practice.

Whether the proposals are agreed to by the United States Congress, and how the EU may implement such measures given the requirement for unanimity (assuming implementation by way of an EU Directive), present significant hurdles even if the design of Pillar One and Pillar Two could be agreed.

Competition investigations and anti-trust considerations on both sides of the Atlantic also threaten to break up large multinationals which are seen to have market dominance. Whether this would cause a broken up group to fall outside of the scope of these rules would be an interesting parallel development.

For now, we await the further details which are set to be announced in an implementation plan due to be released in October 2021. When the implementation plan is released, we look forward to considering further what that might mean for international tax reform from policy and practical perspectives.