1. The US’s exemption from the global minimum tax, in exchange for the removal of revenge taxes from what President Donald Trump has dubbed his “big, beautiful bill”, has thrown a lifeline to the beleaguered reform championed by the OECD, but its path to success remains uphill.
2. G7 countries agreed to a “side-by-side” solution that “would fully exclude” US-parented groups from the 15% minimum tax on large multinationals championed by the OECD and endorsed by over 140 countries worldwide, according to a joint statement published on June 28.
3. In other words, US multinationals will only respond to US fiscal law and its own minimum thresholds for taxing American profits from abroad.
4. “Delivery of a side-by-side system will facilitate further progress to stabilise the international tax system, including a constructive dialogue on the taxation of the digital economy and on preserving the tax sovereignty of all countries,” reads a joint statement by G7 countries published on June 28.
5. In exchange, the US government committed to abandoning Section 899 of the ‘big, beautiful bill’ being discussed in the US Senate, which proposed introducing retaliatory measures which risked impacting up to 80% of the existing foreign direct investment stock in the country.
6. Trump promised to fight the OECD’s global minimum tax since day one of his second stint at the White House. He has opposed the reform on principle and in practice.
7. “The OECD Global Tax Deal supported under the prior administration not only allows extraterritorial jurisdiction over American income but also limits our nation’s ability to enact tax policies that serve the interests of American businesses and workers,” the executive order he signed on inauguration day on January 20 reads.
8. Trump has characterised the move to shield US companies from the reform as a matter of recapturing “our Nation’s sovereignty” and asserting the supremacy of US law over rules and regulations approved at a multilateral level.
9. “The agreement between the G7 and the US will prevent the loss of more than $100bn in US taxpayer dollars,” Treasury secretary Scott Bessent posted on X on June 26, citing estimates from his department and Congress’s joint committee on taxation. The latter has forecast that if the rest of the world adopts the global minimum tax and the US does not, its fiscal revenues would drop by $122bn between 2023 and 2033 because of the loss of revenues from the global intangible low-taxed income combined with profit shifting dynamics; if all countries adopt it, the committee estimates that US revenue losses would stand at $57bn over the 10 year period.
THE G7 PERSPECTIVE
1. The threat of retaliatory taxes against companies from countries implementing the global minimum tax reform, enshrined in a new Section 899 of the tax code proposed within the ‘big, beautiful bill’ resonated loudly with G7 partners.
2. All G7 countries except for the US are implementing the global minimum tax. Besides, they all feature among the US’s largest foreign investors. Analysis of government data by the Tax Foundation found that more than 80% of the current US FDI stock emanates from countries caught by the bill’s retaliatory tax provisions. Most of that stock originates from companies from Japan, Canada, Germany, France, Italy and the UK.
3. Ultimately, Section 899 served the purpose of strong-arming G7 partners in yielding to requests from the US Treasury.
THE OUTLOOK
4. “It is a sign of the US playing regulatory hardball to secure carve-outs while dismantling Section 899 in exchange,” says Julien Chaisse, professor of law at the City University of Hong Kong. “If this sticks, it amounts to a soft renationalisation of Pillar Two: the US will, in effect, implement the minimum tax on its own terms while denying enforcement rights to others.”
5. Not without hiccups, more than 140 countries have signed up to the global minimum tax reform after long years of negotiations.
6. “We recognise that these issues have relevance to a wider group of jurisdictions and look forward to discussing and developing this understanding, and the principles upon which it is based, within the Inclusive Framework with a view to expeditiously reaching a solution that is acceptable and implementable to all,” reads the G7 statement.
7. All participating countries will have to confirm the G7 agreement within the context of the OECD/G20 Inclusive Framework via consensus. The outcome of that process may not be a foregone conclusion at this stage.
8. “I see the non-trivial risk of having non-OECD countries breaking ranks,” says Pascal Saint-Amans, the former head of the OECD Centre for Tax Policy and Administration and now a partner at advisory firm Brunswick and professor at Lausanne University. He adds that these countries may feel that the US has been given a free pass from the same organisation that urges them to fall in line when it comes to tax havens and harmful tax practices.
9. Developing countries have had mixed feelings towards a reform that limits their capacity to pull fiscal levers to attract investment and make up for structural weaknesses in their competitiveness.
10. “Whether the reform still has a future depends on whether other countries view this as a fair compromise or as the US immunising its MNEs while demanding global compliance from others. If the latter, the legitimacy of the whole framework will be undermined,” concludes Chaisse.
Source:
https://www.fdiintelligence.com/content/fda9b3ca-c883-41af-a6dd-d3dc58606208
