More than 130 Countries Reach Consensus on 15% Minimum Tax and New User-Focused Taxing Right—What Are the Implications?

By Stuart E. Leblang, Zachary M. Rudisill, Michael J. Kliegman and Amy S. Elliott

On July 1, ¹ officials from 130 countries and jurisdictions (with Peru and Saint Vincent and the Grenadines later making it 132) ² signed off on a five-page statement ^[3] (the Statement)—which the G20 (Group of 20) then endorsed on July 10 ^[4] —effectively agreeing to the following:

• The signatories agree to the concept ⁵ of the Global anti-Base Erosion (GloBE) rules of so-called Pillar Two (which will generally apply to firms with annual global revenue over about $890 million, with important exceptions ⁶ ), namely by:
• Enacting a global minimum tax of at least 15 percent, effective in 2023 (estimated to generate around $150 billion in additional tax revenue per year ⁷ );
• Enacting an undertaxed payment rule of at least 15 percent, possibly effective in 2023, although deferred implementation is already contemplated; and
• Upon the request of developing countries, amending tax treaties to include a subject to tax rule at a rate of between 7.5 percent and 9 percent.
• The signatories plan to reallocate some taxing rights (which profits can be taxed by which countries) by reference to the location of a business’s users (so-called Pillar One), designed to get at the Facebooks, Googles and Amazons ⁸ of the world, by implementing a new user-focused taxing right starting in 2023 (largely by amending tax treaties).⁹ 

This is the latest development in a movement active over much of the last decade known as the OECD/G20 Inclusive Framework on BEPS (which stands for Base Erosion and Profit Shifting). ¹⁰   Before we get into more detail on each of the changes highlighted above, we first want to stress that the “ambitious” timetables in the agreed-upon Statement (which contemplates that all 132 signatories are committed to enacting complex laws in the next year and a half that have not yet even been drafted, let alone vetted by lawmakers) are extremely optimistic even in the best of circumstances.  And while the Statement identifies those high-level components that have been agreed to, additional details and an implementation plan (including a plan to develop model legislation) are not expected until October 2021 at the earliest.

Our Takeaways

• This news has not had a significant impact on the markets. Most observers rightly concluded that the effects, if any, will be merely incremental and could takes years. ¹¹  As a reminder, even though agreement on these components has been reached, until the actual rules are incorporated into each jurisdiction’s laws and tax treaties (requiring the approval of Congress in the case of the United States), they will not have force.  Consider that it takes two-thirds of the U.S. Senate (67 senators) to ratify any tax treaty or amendments—something that last happened in 2019 ¹² (although no full tax treaty has been ratified by the Senate since 2010).  That said, if the aggressive timeframe in the Statement is adhered to (a big IF in the United States, especially with respect to the changes contemplated by Pillar One), companies should expect that the profits they earn in 2023 could be subject to the new rules.¹³  This should be of most concern to the five U.S. firms—Facebook, Google, Apple Inc. (NASDAQ: AAPL), Intel Corporation (NASDAQ: INTC) and Microsoft Corporation (NASDAQ: MSFT)—that could annually have $28 billion in aggregate profits reallocated to higher tax jurisdictions under Pillar One. ¹⁴ 
• The global minimum tax is similar to the U.S.’s global intangible low-taxed income (GILTI) regime. However, this agreement does not mean that the Biden administration is prepared to lower its proposed 21 percent GILTI rate to 15 percent, although such a move could be politically expedient if Biden hopes to assuage moderate Democrats worried about the competitiveness of U.S. multinationals.  Recall that the GILTI rate is technically now set at 10.5 percent, although there is a 20 percent foreign tax credit (FTC) haircut (so that only 80 percent of FTCs are allowed when calculating GILTI).  This means that, in practice, the actual GILTI rate today is now as high as 13.125 percent (and could go as high as 26.25 percent, if the increase Biden is seeking gets enacted¹⁵).  Meanwhile, some in Congress question why the Biden administration is angling for increasing the U.S.’s global minimum tax rate well above 15 percent before such a tax has even been implemented by its global competitors.
• In the short-term, there is a decent (50 percent) chance that Congress could enact certain changes to GILTI (namely an increase in the GILTI rate and a rule change to calculating GILTI on a country-by-country basis ¹⁶ ) such that the United States would satisfy at least part of its global minimum tax commitment by the 2023 target effective date. Any changes associated with Pillar One will likely proceed on a separate, later track (Treasury Secretary Janet Yellen said July 11 that the Pillar One changes could be ready for Congress to review by spring 2022 ¹⁷ ).  Note that the Statement reflects an agreement to support both changes—agree to a global minimum tax and agree to reallocate some taxing rights by reference to users—and if the United States fails to follow through on the latter, the accord could fall apart. ¹⁸ 
• Because four member states of the European Union (EU) (Cyprus, Estonia, Hungary and Ireland) have not agreed to the Statement, the EU (which is a member of the G20 ¹⁹ ) technically cannot sign off on the deal, as it requires unanimity from all members. Although holdouts, such as Ireland, will be under increasing pressure to get on board, if even one EU member state ultimately stands firm on withholding support, that could potentially stop other EU member states from moving forward with implementation. ²⁰ 
• Although the agreed-upon Statement contemplates “the removal of all Digital Service Taxes” (DSTs) upon application of the new rules, there remains significant skepticism as to that point. This conflict has been extremely visible in recent days, as the European Commission only announced July 12 ²¹ that it would postpone until October its planned unveiling of a new 0.3 percent sales tax on online transactions (arguably not a DST on gross revenue ²² ) that it may impose on companies that collect about $60 million in annual sales and operate in the EU. ²³  Meanwhile, the United States is prepared to impose retaliatory tariffs on countries that don’t follow through with the DST “standstill and withdrawal” ²⁴ (tariffs that, in some cases, have already been imposed and stayed to give international tax negotiations additional time ²⁵ ). U S. tech firms eager to avoid the imposition of DSTs and U.S. importers and retailers eager to avoid the imposition of retaliatory tariffs are pressuring those involved in the OECD and G20 discussions to stand by this agreement.

Pillar Two: Global Minimum Tax Basics

The global minimum tax (the foundation of the Pillar Two GloBE rules) is an income inclusion rule similar to the U.S.’s GILTI regime (although GILTI arguably has no de minimis threshold, ²⁶ the Statement provides that a country is “free to apply” the global minimum tax to all multinationals headquartered there).

In general, multinationals that are parented in countries that adopt a global minimum tax will have to pay at least 15 percent tax on all of their worldwide income, even if they have foreign operations in a country where the tax rate is less than 15 percent.  Such a global minimum tax effectively moves low-taxed foreign income into the taxing jurisdiction of the high-tax country.

The Statement provides that computations for such a tax must be made on a country-by-country basis (a change the Biden administration has also proposed for GILTI).  It also provides that a certain portion of income (7.5 percent of the value of tangible assets and payroll, to be reduced to 5 percent after the first five years) will not be subject to the rule.  This carve-out is similar to the current qualified business asset investment (QBAI) deduction in GILTI that Biden is seeking to have repealed (although the QBAI deduction is set at 10 percent of tangible assets’ adjusted bases).  The statement does not mention an FTC haircut (as is in place for GILTI).

Undertaxed Payment Rule Basics

The undertaxed payment rule (a prong of the Pillar Two GloBE rules) is similar to Biden’s Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) rule, which helps bolster the effectiveness of the global minimum tax and puts pressure on those countries that are holdouts.  When a country has in place a SHIELD-like rule (SHIELD Country), a multinational that is parented in a country that has not adopted a global minimum tax of at least 15 percent ²⁷ but that has subsidiary operations in the SHIELD Country would be at risk of having its deductions denied ²⁸ for subsidiary payments made back to the parent or other related entity.

For a more detailed description of the SHIELD rule, see our June 2, 2021 report “Biden Green Book Tax Proposals’ Impact on Publicly Traded Companies.”

Pillar One:  New User-Focused Taxing Right Basics

The new user-focused taxing right of Pillar One will generally only apply to very profitable companies—or maybe, as in the case of Amazon,²⁹very profitable business segments—where “very profitable” will be defined as those companies with profit margins over 10 percent.

Further, only very profitable companies that are large (with annual global revenue over about $24 billion, ³⁰ reduced to about $12 billion if, within 7 years of the agreement coming into force, it is determined that the formula has been successfully implemented) will be subject to Pillar One (so that it will only impact about 100 companies total ³¹ ).  Companies within certain sectors are entirely excluded from the rules, namely extractive industries (covering commodities such as gas, oil, minerals, etc.) and regulated financial services.

Under this new rule, those profitable, large companies within scope will have the taxing rights to some portion—between 20 percent and 30 percent—of their excess profits (those profits exceeding the 10 percent margin) reallocated to market jurisdictions based on the location of where the goods or services sold by the companies are used or consumed.  Upon implementation, this new user-focused taxing right should cause more than about $100 billion of profit to be reallocated each year, ³² and it is expected that most of the companies subject to the reallocation will be headquartered in the United States. ³³  However, Treasury has indicated that it does not think implementation of Pillar One will result in a significant loss of revenue to the fisc, because while certain profits may be allocated away from America, other profits will be allocated to America, resulting in a wash. ³⁴ 

For a more detailed breakdown of the changes contemplated by Pillar One, including the formula to determine how much of a company’s profits will be reallocated to which countries, see our October 18, 2019 report “OECD’s New Approach to International Taxation May Help the U.S. Fisc but Hurt its Multinationals—Nevertheless Many Support It.”

What to Watch For

As we previewed, while this agreement on numerous changes to the international tax rules is certainly historic, the details still need to be nailed down.  In particular, while some carve-outs have already been identified (for example, extractive and regulated financial services companies are exempt from Pillar One), we would expect intense lobbying to expand these (for example, the Statement already contemplates that members may ultimately decide to exclude start-up multinationals from application of the Pillar Two global minimum tax).

• The G20 Finance Ministers and Central Bank Governors, who met in Venice last week, stressed that they wanted to “swiftly address the remaining issues and [finalize] the design elements . . . by our next meeting.” ³⁵ But, back at home, some U.S. lawmakers have been criticizing Yellen for what they view as a failure to actively consult with them to ensure that what is being agreed to does not concede “ground to foreign counterparties and [harm] the U.S. economy.” ³⁶ 
• Although it did not sign onto the Statement, Ireland fully supports the Pillar One proposal and has expressed broad support for Pillar Two (although not the rate). ³⁷ It is expected that Ireland will continue to push “for terms that would allow small countries to make up for the loss of any tax advantage”—a push that is reportedly supported by the accounting firm Ernst & Young. ³⁸  Keep an eye out for any indication that the negotiations might be moving in Ireland’s favor.
• Keep a close eye on the G20 Summit of Heads of State and Government in Rome October 30-31, ³⁹ at which point it is hoped that the technical details of and an implementation plan for Pillars One and Two will be sorted out and announced.
• While this agreement certainly creates momentum, there is still a long way to go before enactment. For example, Biden has said he wants to repeal the base erosion and anti-abuse tax (BEAT) and replace it with the SHIELD rule (which would be more in line with the changes contemplated by Pillar Two).  But it isn’t clear that Democrats on the powerful tax-writing Senate Finance and House Ways and Means committees are on board with that plan (at least in the short-term), meaning the BEAT may stay in place at least through any potential reconciliation effort this fall even though it arguably is inconsistent with the agreed-upon Statement.

In October 2019, we noted that “pressure is building to come to an agreement, and there is a path by which we could see it enacted within as quickly as two years.”  While G20 agreement on the details of Pillars One and Two could come as soon as October 2021, it will certainly take time for countries to change their laws—we suspect more time than is contemplated in the Statement.

With regard to the GILTI changes contemplated by Yellen (who is not waiting for other countries to reach agreement on the exact details of Pillar Two before the United States makes its move ⁴⁰ ), it is still possible that Congress could pass some version of them (cherry-picking among or modifying Biden’s plans to eliminate the QBAI deduction, increase the headline rate from 10.5 percent to something higher and calculate GILTI on a country-by-country basis) in the context of an infrastructure reconciliation bill likely sometime this fall.  Such legislation could also include an increase in the headline corporate tax rate.  However, at this point in time, we would guess that the chance of such a reconciliation package (containing some GILTI changes) getting enacted this year is maybe 50 percent.

As for the United States implementing a rule change to reflect a reallocation of taxing rights (Pillar One) as contemplated by the Statement, we think that is much farther off (it didn’t even show up in Treasury’s so-called green book (General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals)).

^{[1] Press Release, 130 countries and jurisdictions join bold new framework for international tax reform, OECD (July 1, 2021) (https://www.oecd.org/newsroom/130-countries-and-jurisdictions-join-bold-new-framework-for-international-tax-reform.htm).}

^{[2] As of July 9, 2021, the countries and jurisdictions did not include these seven holdouts that, as of February 2021, had been participating members of the OECD/G20 Inclusive Framework on BEPS: Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria and Sri Lanka (https://www.oecd.org/tax/beps/oecd-g20-inclusive-framework-members-joining-statement-on-two-pillar-solution-to-address-tax-challenges-arising-from-digitalisation-july-2021.pdf and https://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf).}

^{[3] OECD/G20 Base Erosion and Profit Shifting Project Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy (July 1, 2021) (https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf).}

^{[4] Third G20 Finance Ministers and Central Bank Governors Meeting Communiqué (July 10, 2021) (https://www.g20.org/wp-content/uploads/2021/07/Communique-Third-G20-FMCBG-meeting-9-10-July-2021.pdf).}

^{[5] Technically, implementation of Pillar Two is not required by all signatories, and it is expected that certain low-or no-tax jurisdictions that signed onto the Statement will not in fact be implementing a global minimum tax.}

^{[6] €750 million = about $890 million as of July 12, 2021. Parent entities exempt from the GloBE rules include government entities, international organizations, nonprofits, pension funds and investment funds.  Further, it is expected that international shipping income will also be exempt from the GloBE rules.}

^{[7] Supra note 1. However this is much higher than prior estimates.  At one time, it was estimated that broad enactment of both Pillars One and Two would increase global corporate income tax revenue by between $50 billion and $80 billion per year.  See October 2020 Organisation for Economic Co-operation and Development (OECD) analysis of the economic and tax revenue implications of the Pillar One and Pillar Two proposals (https://www.oecd-ilibrary.org/taxation/tax-challenges-arising-from-digitalisation-economic-impact-assessment_0e3cc2d4-en).}

^{[8] Facebook, Inc. (NASDAQ: FB), Alphabet Inc. (NASDAQ: GOOGL) (Google) and Amazon.com, Inc. (NASDAQ: AMZN).}

^{[9] However, the Statement contemplates that Pillar One (specifically, Amount A) will be implemented by way of a multilateral instrument (MLI) or multi-country agreement that would automatically modify/supersede the application of certain treaties.  Because the U.S. never signed onto the original BEPS MLI, this streamlined procedure would presumably not be available and two-thirds of the Senate would have to agree to either this new multi-country agreement or each amended bilateral treaty.}

^{[10] For more on the OECD’s BEPS project, see https://www.oecd.org/tax/beps/.}

^{[11] “Its effects will be slight for most companies, and won’t be felt for some time,” as reported by Nicholas Jasinski, What a 15% Global Minimum Corporate Tax Rate Means for the Stock Market, Barron’s, June 9, 2021 (subscription required); “Finance executives at multinational companies are trying to assess the potential implications of a global minimum tax for their businesses, with many of them skeptical whether the plan will come to fruition anytime soon,” as reported by Mark Maurer, Finance Chiefs Weigh the Impact, and the Odds, of a Global Minimum Tax, Wall ST.  J., July 12, 2021 (https://www.wsj.com/articles/finance-chiefs-weigh-the-impact-and-the-odds-of-a-global-minimum-tax-11626091201).}

^{[12] For example, see https://home.treasury.gov/news/press-releases/sm763}

^{[13] Addressing the tax challenges arising from the digitalisation of the economy, OECD/G20 Base Erosion and Profit Shifting Project, July 2021 (https://www.oecd.org/tax/beps/brochure-addressing-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf).}

^{[14] Michael Devereux and Martin Simmler, Who Will Pay Amount A?, Econpol Policy Brief, European Network for Economic and Fiscal Policy Research (July 2, 2021) (https://www.econpol.eu/sites/default/files/2021-07/EconPol_Policy_Brief_36_Who_Will_Pay_Amount_A_0.pdf).}

^{[15] Biden is also seeking an increase in the statutory corporate income tax rate from 21 percent to 28 percent.}

^{[16] This change would mean that income (and foreign tax credits) from both high-and low-tax jurisdictions cannot be blended, as is the case under current law.}

^{[17] David Lawder and Gavin Jones, Multinationals tax shift unlikely until 2022, says Yellen, Reuters, July 11, 2021 (https://www.reuters.com/business/uss-yellen-says-expects-finalize-tax-changes-large-firms-2022-2021-07-11/).}

^{[18] “[T]he international consensus rests on pairing them and completing both tasks,” wrote Richard Rubin in Global Tax Deal Heads Down Perilous Path in Congress, Wall ST. J., July 11, 2021 (https://www.wsj.com/articles/global-tax-deal-heads-down-perilous-path-in-congress-11626008186).}

^{[19] The G20 is comprised of Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the EU.}

^{[20] “Absent unanimous approval among the members of the European Union, an accord would stall.  Establishing a minimum tax would require an E.U. directive, and directives require backing by all 28 countries in the union.  Ireland had previously hinted that they would object to or block a directive and Hungary could prove to be an even bigger hurdle given its fraught relationship with the union, which has pressed Hungary on unrelated rule-of-law and corruption issues,” as reported by Alan Rappeport, Global Tax Overhaul Gains Steam as G20 Backs New Levies, N.Y. Times, July 10, 2021 (https://www.nytimes.com/2021/07/10/us/politics/global-tax-overhaul-g20.html).}

^{[21] Laurence Norman, EU to Put on Hold Digital Levy Following G-20 Minimum Tax Plans, Wall ST. J., July 12, 2021 (https://www.wsj.com/articles/eu-to-delay-digital-levy-following-g-20-minimum-tax-plans-11626087049).}

^{[22] For more on DSTs, see our prior report “Multi‐Billion Dollar Digital Services Tax Could Fall on Few U.S. Companies, Harming Consumers and/or Stock Prices” (Sept. 19, 2019).}

^{[23] Bjarke Smith-Meyer, Brussels pushes on with EU digital levy despite U.S. resistance, Politicopro, July 8, 2021 (subscription required).}

^{[24] Addressing the tax challenges arising from the digitalisation of the economy, OECD/G20 Base Erosion and Profit Shifting Project, July 2021 (https://www.oecd.org/tax/beps/brochure-addressing-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf).}

^{[25] “The U.S. imposed -- but immediately delayed the implementation of -- tariffs in retaliation for duties that six nations placed on internet companies, allowing time for broader international negotiations on taxes,” as reported by Eric Martin, U.S. Delays Digital-Tax Tariffs Amid Talks on Broader Deal (1), Daily Tax Report, June 2, 2021 (subscription required).}

^{[26] While a portion of the net income of a controlled foreign corporation is currently excluded from GILTI (the qualified business asset investment or QBAI deduction, designed to reflect a prescribed return on the company’s tangible assets), the Biden administration has proposed repealing the exclusion.  Of note, Ireland is against Biden’s plan to repeal the QBAI deduction.}

^{[27] U.S.-parented multinationals would not have to worry about this as long as the GILTI rate is increased to at least 15% (currently, the GILTI rate is 10.5%).}

^{[28] Instead of denying deductions, the undertaxed payment rule could also require an equivalent adjustment.}

^{[29] On Amazon:  “Amazon did not start to generate significant profits until 2017, and they have consistently been below the 10 per cent margin threshold agreed by the G7 at the weekend.  However, the OECD in Paris, which is convening the international negotiations on the global rate, is exploring a special measure to treat Amazon’s cloud-computing division as a separate entity, said a person briefed on the discussions.  The measure would force Amazon to pay more tax in large European countries such as France, Germany, the UK and Italy.  Amazon Web Services’ operating income jumped 47 per cent to $13.5bn last year, generating a healthy operating margin of 30 per cent in 2020, compared with 3 per cent for its retail business,” as reported by Chris Giles, Tim Bradshaw and Emma Agyemang, G7 moves to tap Amazon in new global corporate tax plan, Financial Times, June 7, 2021 (https://www.ft.com/content/1b16c49d-b8fd-4eac-9ff1-d5e8b9510110); However, the United States has been clear that any agreement regarding Pillar One cannot be “discriminatory towards U.S. firms,” (see April 8, 2021, slide presentation by Treasury to the Inclusive Framework Steering Group at https://www.politico.com/f/?id=00000178-b389-d098-a97a-f79960510001).}

^{[30] €20 billion = about $24 billion as of July 12.}

^{[31] Addressing the tax challenges arising from the digitalisation of the economy, OECD/G20 Base Erosion and Profit Shifting Project, July 2021 (https://www.oecd.org/tax/beps/brochure-addressing-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf); However, a more recent estimate indicates that the total number of companies affected may only be 78 (Michael Devereux and Martin Simmler, Who Will Pay Amount A?, Econpol Policy Brief, European Network for Economic and Fiscal Policy Research (July 2, 2021) (https://www.econpol.eu/sites/default/files/2021-07/EconPol_Policy_Brief_36_Who_Will_Pay_Amount_A_0.pdf)).}

^{[32] Supra note 1; However, a more recent estimate indicates that the total amount reallocated could be more like $87 billion (Michael Devereux and Martin Simmler, Who Will Pay Amount A?, Econpol Policy Brief, European Network for Economic and Fiscal Policy Research (July 2, 2021) (https://www.econpol.eu/sites/default/files/2021-07/EconPol_Policy_Brief_36_Who_Will_Pay_Amount_A_0.pdf)).}

^{[33] “U.S.-headquartered multinationals would make up 64% of total allocations, according to the report published Tuesday by the Oxford University Centre for Business Taxation,” as reported by Hamza Ali, U.S. Companies to Bear Brunt of Reallocation Under OECD Tax Deal, Daily Tax Report, July 6, 2021 (subscription required).}

^{[34] “The administration says Pillar One will have little impact on revenue, because the U.S. would cede some taxing authority but gain power over companies selling to Americans,” wrote Richard Rubin in Global Tax Deal Heads Down Perilous Path in Congress, Wall ST. J., July 11, 2021 (https://www.wsj.com/articles/global-tax-deal-heads-down-perilous-path-in-congress-11626008186).}

^{[35] Supra note 4.}

^{[36] July 8, 2021 letter from Rep. Kevin Brady (R-Texas) and Sen. Mike Crapo (R-Idaho) to Treasury Secretary Janet Yellen (https://subscriber.politicopro.com/f/?id=0000017a-87e6-d91b-abfe-87ff71760001&source=email).}

^{[37] Press Release, Ireland’s Minister for Finance, Ireland broadly supports OECD Inclusive Framework Agreement on key aspects of new international tax rules with reservation – Donohoe (July 1, 2021) (http://paschaldonohoe.ie/ireland-broadly-supports-oecd-inclusive-framework-agreement-on-key-aspects-of-new-international-tax-rules-with-reservation-donohoe/).}

^{[38] Liz Alderman, Ireland’s Days as a Tax Haven May Be Ending, but Not Without a Fight, N.Y. Times, July 8, 2021}

^{[39] https://mnetax.com/yellen-predicts-ireland-eu-will-cooperate-on-minimum-tax-but-us-might-move-first-44701}

^{[40] Doug Connolly, Yellen predicts Ireland, EU will cooperate on minimum tax, but US might move first, MNE Tax, June 16, 2021 (https://mnetax.com/yellen-predicts-ireland-eu-will-cooperate-on-minimum-tax-but-us-might-move-first-44701).}