The landmark, two-pillar global corporate tax deal is set to generate hundreds of billions of dollars in additional tax revenue, but there is work to do to ensure it is a success
Since 2008, the G20 and the Organisation for Economic Co-operation and Development have collaborated on international corporate tax reform to introduce transformative and potentially revolutionary changes to the framework governing multinational business profits. These efforts culminated in October 2021, when more than 135 jurisdictions representing approximately 95% of global gross domestic product concluded an international tax agreement that proposed a global minimum corporate tax rate and other detailed rules. Given the significant progress made in finalising and implementing the agreement’s two pillars since and the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting’s recent outcome statement, the G20 summit in New Delhi is poised to be a watershed moment for the regime.
Since the G20 leaders first met in Washington in 2008, they have consistently deliberated on international corporate tax reform at their summits and made actionable commitments to effect change. Overall, G20 leaders have dedicated 13,787 words to international taxation in their outcome documents, representing approximately 6% of the total words. These conclusions contained 138 collective, politically binding, future-oriented commitments on international taxation or approximately 4% of the total on all subjects. Of these commitments, the G20 Research Group has assessed 33 for G20 members’ compliance in the year after they were made. Overall, the G20’s commitments to tax reform have outperformed other policy areas, averaging 77% from 2008 to 2022, well above the all-subject average of 71%. In 2021, average compliance spiked to 88%. At the 2022 G20 summit in Bali, leaders committed to swiftly implementing the two-pillar solution in the international tax agreement.
A significant deal
The corporate tax deal reached in 2021 is significant because it proposed new constraints on state sovereignty through a historically unprecedented political and executive agreement on common goals, a technical design framework and implementation strategies. The agreement comprises two pillars. Pillar One targets the world’s largest digital services firms and reallocates a portion of their taxable income to market jurisdictions where their business occurs. Pillar Two introduces an unprecedented country-by-country minimum corporate tax rate of 15% and detailed rules intended to prevent the under-taxation of cross-border income. The OECD estimates it will generate additional tax revenue of $220 billion a year. When implemented, the two pillars will reallocate billions of tax receipts, reduce corporate tax base erosion, increase tax system fairness and enhance economic efficiency.
Although the original two-year timeframe for finalising and implementing the two pillars has been delayed, G20 members and the Inclusive Framework have made significant progress since October 2021. On 11 July 2023, 138 members of the Inclusive Framework agreed on an outcome statement that summarised the deliverables developed and the remaining elements needed to implement the two-pillar solution. These include a text for a new multilateral convention and proposed framework for implementing Pillar One, the Subject-to-Tax Rule and implementation framework, and a comprehensive action plan for implementing the 2021 deal. By 21 July, six tax jurisdictions had implemented Pillar Two in domestic law, and 29 had either drafted or signalled their intention to implement legislation.
Although implementation of Pillar Two is under way globally, the core challenge is ensuring the G20 and Inclusive Framework agree on the text of the new multilateral convention implementing Pillar One and remove their unilateral digital services taxes. Inclusive Framework members also agreed in July to extend negotiations on digital services taxation until at least 2024 and to freeze the implementation of unilateral digital services taxes. However, Belarus, Canada, Pakistan, Russia and Sri Lanka did not endorse the extension, highlighting ongoing diplomatic tensions. Furthermore, doubts linger about US support for a final multilateral convention and capacity to pass legislation implementing Pillar One in Congress, given Republican opposition to the deal.
To ensure the successful implementation of the landmark global tax deal, the world leaders gathered at the New Delhi Summit should redouble their commitment to signing and ratifying the multilateral convention when it opens for signature to ensure its entry into force in 2025. In addition, G20 members should forge a consensus on removing unilateral digital services taxes to prevent a breakdown in hitherto successful international tax cooperation.