G-20 backs G-7 support for global minimum tax and new allocation rules – what’s the real impact?

The G-7 finance ministers on 5 June issued a communiqué in support of a global minimum tax of at least 15% imposed on a country-by-country basis and expressed a commitment to reaching “an equitable solution” on the allocation of taxing rights among jurisdictions. The finance ministers’ declaration was followed on 1 July by a more detailed statement from the Inclusive Framework, a network of 139 countries working on global tax issues under the auspices of the OECD, establishing a framework for international tax reform. On 10 July, the G-20 finance ministers endorsed the key components of the plan.

The OECD Inclusive Framework now faces the considerable task of finalising the details and creating an implementation plan in time for the G-20 summit scheduled for the end of October 2021.

Pillars One and Two

The G-20 finance ministers endorsed the Inclusive Framework’s plan to address the tax challenges arising from globalisation and the digitalisation of the economy and to adopt a global minimum tax. The OECD’s initiative centres around a two-pronged approach first proposed in late 2019.

Pillar One of the OECD/Inclusive Framework blueprint would revamp tax allocation rules so that a portion of a multinational entity’s residual profit would be taxed in the market jurisdictions where the revenues of the multinational are derived. Broadly, this would allow countries where a business’s customers are located to tax between 20% and 30% of the profits that exceed a 10% margin of the largest and most profitable multinational enterprises (those with revenue above EUR 20 billion and profit margins above 10% of revenue). This reallocation would be calculated using a formula rather than the arm’s length standard, and would be in addition to any profits already taxed in that country under the arm’s length standard.

Pillar Two proposes a global minimum tax of at least 15%. Under this proposal, all participating countries would ensure that businesses with headquarters in their jurisdictions pay at least 15% corporation tax on all domestic profits and a top-up tax on the profits of their foreign subsidiaries taxed locally at less than the agreed global minimum tax of at least 15%. Companies would therefore lose the benefit of being established in low tax jurisdictions because they would have to pay the top-up tax, which would remove the incentive to shift profits to those low-tax jurisdictions.

In addition to supporting both Pillars One and Two of the OECD plan, the G-7 finance ministers backed the goal of reaching agreement on both pillars in tandem, and vowed to provide international coordination to apply the proposed international tax rules and repeal the various digital levies, including digital services taxes, that have proliferated in recent years (see BDO’s interactive map).

Unanswered questions

While these policy announcements are a major vote of confidence in the OECD’s plan, they leave many details, both technical and policy-related, unresolved. A discussion of the major hurdles that must be overcome before global agreement is reached follows.

Is the right amount of profit reattributed?

The OECD/Inclusive Framework statement calls for the reallocation of between 20% and 30% of residual profits, defined as profits in excess of 10% of revenue. This is an increase from the 20% proposed in the G-7 statement, and it remains to be seen where discussions will ultimately settle within this range. Small and developing nations may continue to make a case that a higher quantum of profits within the suggested range should be reallocated. This may come as part of the ‘bargaining’ around the repeal of digital levies including digital services taxes around the world

What sectors should be in scope?

The Inclusive Framework statement specifically excludes the regulated financial services and extractive industries from the scope of Pillar 1. Similarly, government entities, non-profit organisations and some investment funds are not subject to the Global anti-Base Erosion (GloBE) rules of Pillar 2, and international shipping Income is exempt from those rules. As negotiations continue, other nations may try to negotiate further exclusions for their favoured sectors as part of striking a broader deal, so it is possible that additional industries may eventually be excluded to help reach an agreement that all 139 Inclusive Framework member states will implement.

What should the Pillar Two minimum tax rate be?

A minimum corporation tax rate of “at least 15%” goes against the grain for those countries that have engaged in the ‘race to the bottom’ of corporate taxes to attract businesses. Some jurisdictions that have benefited from low corporate tax rates have announced opposition to the 15% rate. It remains to be seen if those countries can be brought on board. There is also no apparent mechanism to ensure a consistent minimum tax rate across all jurisdictions looking to implement Pillar Two. As such, it is possible that different countries may adopt different minimum tax rates in their local implementation of the Pillar Two proposals.

Can—and should—unilateral measures coexist with these proposals?

The G-7’s statement includes a commitment to help coordinate the rollback of all digital services taxes and other relevant similar measures. But over 60 countries have already enacted some form of digital tax. The G-20 announcement did not make any similar explicit commitment, and therefore there is perhaps a remaining element of doubt on the future of digital taxes. After the G-20 announcement, the European Union announced that it no longer plans to proceed with the introduction of a digital levy at this time. It remains to be seen whether other countries follow the EU’s lead in rolling back the introduction of, or accelerating the repeal of, digital taxes, including DSTs.

If the new taxing rights that the IF proposal would create yield lower tax revenues for these jurisdictions than a domestic digital tax would, it is difficult to see why they would agree to participate in the OECD/G-20 project and revoke their digital taxes. Another possibility is that other types of taxes would proliferate if digital ones are abandoned. For example, the EU is proposing a ‘carbon border adjustment’ mechanism to raise revenues for the Commission budget.

How the OECD will seek to resolve the potential tension around tax revenues remains to be seen, and the possibility that the OECD may back some form of multilateral digital tax (possibly focused around businesses not within the scope of Pillar 1 Amount A) cannot be ruled out.

What do the proposals mean for developing countries?

Even if the Inclusive Framework plan is adopted in full, would that really level the tax playing field for smaller and developing countries? While the OECD seeks “a fairer distribution of profits and taxing rights among countries”, it is likely that most global companies would remain based in major jurisdictions. If the advantage of using low corporate tax rates to attract direct investment to a country is counteracted by the imposition of a global minimum corporate income tax, major trading nations may switch to non-tax (or at least non-corporate income tax) subsidies and incentives to attract global businesses. For example, the Swiss finance ministry has stated that “Switzerland will take the necessary measures to continue to be a highly attractive business location”. Unless the current WTO rules are tightened considerably, the OECD plan may just convert tax avoidance behaviour into local subsidy hunting, which may be marginally more transparent, but would it be any fairer globally?

How will the risk of double taxation be mitigated?

The introduction of new taxing rights could create an environment where two or more territories may claim taxing rights over the same income. The OECD/Inclusive Framework Pillar One proposal includes a section on the elimination of double taxation, which states that the double taxation of profit allocated to market jurisdictions will be relieved using either the exemption or the credit method. Should reallocated profit be exempt in the territory in which the profit currently sits, or should the territory from which the profits are reallocated provide a credit for taxes paid elsewhere? The former approach could result in multinational companies paying less tax than they do today under some fact patterns, an outcome that would be difficult politically. However, it would be more challenging to ensure that no double taxation arises through the interaction of different tax regimes under the latter approach.

Will the global minimum tax be subject to a global revenue threshold?

Implementation of a global minimum tax on a jurisdictional basis may pose administrability challenges for both taxpayers and tax authorities, which would be exacerbated if all businesses fell within the scope of the minimum tax provisions. Conversely, setting a global revenue threshold so high that only a comparatively small number of large global enterprises would end up being subject to the minimum tax could diminish the intended impact of the proposals. The OECD/Inclusive Framework statement suggests a global revenue threshold of EUR 750 million; however, it also states that countries would be free to apply the Pillar Two principles to multinational entities headquartered in their country even if they do not meet this suggested threshold. At this stage, there is significant uncertainty as to how local implementation of Pillar Two may proceed when weighing the potential administrative cost for taxpayers and tax authorities against the achievement of the policy intentions and the potential revenue gains that a lower threshold may better enable.

Will global revenue thresholds simply be a starting point?

There is an inherent tension in the way the current tax system operates, given its focus on physical presence in a world where physical presence is becoming increasingly irrelevant. Restricting the proposals to only the largest multinational enterprises has no technical grounding; it is simply a function of the need to ensure the system is administrable for taxpayers and tax authorities alike. The IF proposal recommends that the initial EUR 20 billion global turnover threshold be reduced to EUR 10 billion (with a first review in seven years after the agreement comes into force), which would bring an increasing number of companies within the scope of Pillar 1.

How will the proposal interact with US tax reform?

The OECD/Inclusive Framework proposal shares many similarities with the current US tax regime, or forms part of ongoing discussions for US tax reform. Precisely how the OECD proposals may coexist alongside US measures that share similar goals differ in their application (for example, the US GILTI provisions) will be a key workstream in its own right.

How will local jurisdiction’s tax policy evolve to a global minimum tax rate?

The approach that jurisdictions with corporate tax rates below the proposed minimum rate of at least 15% will adopt has yet to fully emerge. For example, will those jurisdictions seek to raise their corporate tax rate toward 15% to ensure they benefit from any increased tax burden on the profits of businesses subject to the new global minimum tax? Or would jurisdictions whose economy relies on businesses that fall below the EUR 750 million threshold (if that threshold is implemented at a local level) be better served by retaining a low tax rate? Gibraltar is an early mover, having already announced that it will increase its tax rate from 10% to 12.5% and explicitly stating that this may be an interim rate if the OECD proposal of a15% rate advances. However, Gibraltar also acknowledged that it may revisit that increase if its economy, and particularly the financial services sector, is adversely affected.

What is a realistic time frame?

The G-20’s endorsement of the two-pillar approach and the Inclusive Framework’s detailed statement are important milestones on the road to address the taxation of the digital economy. However, there is still a long process ahead. The OECD and the Inclusive Framework are working to finalise a plan for implementation that can be presented at the summit of the G-20 heads of state in Rome at the end of October for final approval.

The OECD/Inclusive Framework statement provides that the Pillar One proposal would be implemented through a multilateral instrument to be developed and opened for signature in 2022, with the new rules coming into effect in 2023. Similarly, the implementation plan for Pillar Two contemplates that it should be brought into law in 2022, to be effective in 2023.

The nature of the two-pillar plan means that domestic legislation would have to be enacted in each individual jurisdiction. Achieving the necessary changes would be a major task for any government, and local political considerations could be an obstacle for global implementation. Therefore, significant doubt remains over whether the OECD timetable is practically achievable. In addition, if one or more Inclusive Framework countries cannot implement the agreement for domestic reasons, the complexity of the approach and the risk of double taxation would increase.


It seems unlikely that a final global agreement on the details of Pillars One and Two can be achieved without some hard political negotiations on the portion of global profit subject to reallocation and the possibility that other digital tax measures may coexist with the new framework.

It may be easier to reach global agreement on Pillar Two than on Pillar One, with the focus primarily on determining an appropriate minimum rate. However, there is reluctance about detaching Pillar Two from Pillar One; they are seen as going hand in hand, and the OECD and G-7 have explicitly stated their intention to continue work on both pillars in parallel. Conversely, it should be easier to drive a consistent approach to implementation of Pillar One (given the need for multilateral treaty changes), whilst there is still some risk that the Pillar Two principles are applied differently around the world (for example, different revenue thresholds of application and differing minimum tax rates.

 In theory, the proposals should ensure that far less global profit goes untaxed (or is subject to low tax); whether enough is recouped globally (and perhaps more importantly by each country) to keep all participating countries on board with the new rules remains to be seen.

In the meantime, multinational businesses should track and manage their exposure to an ever-increasing number of new digital taxes as countries around the world take matters into their own hands, while continuing to monitor developments at the OECD.

BDO’s interactive Taxation of the Digital Economy tool

You can follow future developments in the G-20 and OECD plans at Taxation of the digital economy.

Subscribe to receive the latest BDO News and Insights




International Tax Partner, United Kingdom

Monika Loving portrait MONIKA LOVING

Managing Partner - International Tax Services, United States

Please fill out the following form to access the download.