Exception to the rule? G7 tax deal sparks exclusion talks
As the groundwork for a global tax deal has finally been laid by the G7, officials are bracing for a clash over exemptions and other exceptions for specific industries and special economic zones, with China at the center.
On June 5, the rich and industrialized states of the Group of Seven agreed to support a minimum corporate tax rate of at least 15% and the sharing of the tax rights of the largest companies operating across borders in their countries. Read more
But the official statement from the G7 finance ministers made no mention of whether exceptions and exemptions should be made in the broader ongoing talks, leaving a critical question unresolved.
“If you want to impose a minimum tax, you might consider that no waiver should be made because you should impose the minimum tax. But that’s not realistic,” said Robert Danon, professor of law at the University of Lausanne.
Countries have long used tax incentives to advance policy priorities ranging from stimulating research and development to attracting foreign investment.
Some are now reluctant to abandon these tools, notably China, which for decades used low-tax special economic zones to attract foreign investment, which has been at the heart of its economic development.
An official briefed on the talks said Beijing has “legitimate concerns” about these areas, but China is also offering attractive tax rates to its tech companies, some of which like Alibaba and Tencent (0700.HK) are incorporated in the islands. Cayman, where there is not a corporate tax.
Another official told Reuters that China was against the 15% agreed by the G7 and that winning exclusions would be its condition to catch up on the rate.
So far, other emerging G20 countries have joined the G7, with finance ministers from South Africa, Mexico and Indonesia backing the deal in a Washington Post op-ed. Read more
“I am convinced that in the end we will also come to an agreement with China. Because, as always in such international negotiations, it will be a compromise,” said one negotiator.
Beijing has so far kept its cards closed, with the Foreign Ministry saying G20 finance ministers should heed the concerns of all parties. Read more
Nearly 140 countries are expected to agree in a June 30-July 1 online meeting on future cross-border tax rules before handing the package over to the G20 for support at a July 9-10 meeting. .
The Organization for Economic Co-operation and Development, which led the talks at the technical level, said in a global minimum tax bill in October that it would be possible to exclude investment funds, pension funds, sovereign wealth funds, government agencies. , international organizations and non-profit organizations.
While this has largely gone undisputed, this is not the case for an OECD suggestion in the blueprint that international shipping could fall outside the scope of the minimum tax.
Many countries in the European Union tax shipping companies based on the carrying capacity of their vessels to dissuade them from registering vessels in tax havens, which has helped push up the industry’s average effective tax rate. at only 7%, according to calculations by the International Transport Forum at the OECD.
“Maritime nations are arguing for an exclusion, but some countries are against any exclusion,” said Olaf Merk, ITF shipping expert.
Meanwhile, countries also need to determine whether there should be any exclusions in parallel talks on how to split the rights to tax excess profits from the world’s 100 largest, most profitable companies.
Britain is already seeking the exclusion of its very important financial sector from G7 technical talks, sources familiar with the negotiations said. Read more
The OECD surplus profit tax plan, also from October, suggested that exemptions could be given to natural resources, financial services, construction and residential real estate, international airlines and shipping companies.
Exclusions to be included in a final deal could ultimately decide whether this is a full or partial change for cross-border taxation, Danon said.
“My inclination is that we’re probably going to end up with something in the middle,” he added.
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