This week in taxation: European discord before the G20 tax summit

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While the G7 agreed to a minimum overall corporate tax rate of 15% as part of the second pillar of the OECD proposal, there is still a long way to go before the deal is finalized at G20 and OECD levels. If the G20 comes to an agreement, the world will take one more step towards the most dramatic tax reforms since the 1920s.

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

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

Calls for special treatment in certain sectors have intensified in recent weeks. The UK’s proposal to exempt its financial center, the City of London, from the overall 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 allowing exemptions would jeopardize the simplicity of the deal. “Simplicity means that the fewer deviations from a general principle, the better,” she told reporters.

“Let us remember that developing countries have less capacity to administer taxes and that anything more complicated, all other things being equal, would create risks of derailing the goal of generating more income to invest in the economy. health, education, infrastructure and the green transition, ”said Georgieva.

The hurdles facing the second pillar do not end there, and the Chinese government is concerned about what the deal will mean for its special economic zones. The G20 meeting in Venice on July 9-10 will be another test for the OECD’s proposals.

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G7 leaders must work out key details to secure first pillar plan

Chinese support crucial for G20 tax deal

The G7 deal on global tax reform needs China’s vote at the next G20 meeting for broader approval, but some finance ministers are already criticizing revised pillar one and pillar two proposals.

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

“It’s an important political signal that seven of the most politically powerful countries agree on the principles of tax reform, but it doesn’t mean much unless the G20’s China, India and Brazil are also on board, “said a tax official. based in Asia in a multinational bank.

The G7 deal is to be approved by China at the G20 meeting, given its weak fiscal environment for tech companies and its influence in the Asia-Pacific region to attract a number of developing countries to the ‘agreement.

China is also protecting its tech sector, and government officials will likely aim to defend local concessions at the G20 meeting – especially special economic zones – which lower the corporate tax rate by 25%.

“China has always aligned with the United States in resisting new taxes on big tech companies due to its large local tech sector with Alibaba, Tencent and others,” the tax chief said.

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MNEs must rethink TP before Libor ends

As the end of the London Interbank Offered Rate (Libor) approaches, multinationals should change their TP policies and find an appropriate alternative rate for their future financing.

Multinational enterprises (MNEs) should take advantage of the end of Libor to revise all their business-to-business agreements when replacing the benchmark with a different base rate. Companies should also ensure that the Alternative Risk Free Rate (ARR) aligns with the Arm’s Length Principle (ALP) set by tax authorities.

“All multinationals have business-to-business loan agreements. Some also have intercompany derivative agreements. Although many of them are based on Libor – assuming Libor will always be available, and now of course Libor is not, ”said Graham Robinson, partner at PwC.

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

MNEs will need to choose the most appropriate rate and find a margin above that rate to make it the price of the B2B loan – a complex process to follow as the new rates can be difficult to use.

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

This will apply to all settings in British Pound, Euro, Swiss Franc and Japanese Yen, as well as the One Week and Two Month US Dollar. The remaining value of the US dollar will cease after June 30, 2023.

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Next week at SHOOT

SHOOT will examine issues with India’s tax portal Infosys, as the country’s finance ministry prepares for a public meeting on the subject on June 22. SHOOT will analyze trends in patent box regimes around the world.

At the same time, SHOOTThe Women in Tax Forum – Europe will be held on June 22-23 and will discuss everything from tax transparency to global developments in transfer pricing. 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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