Exception to the rule? G7 tax settlement triggers carve-out talks

With the G7 finally laying the groundwork for a global tax deal, officials are preparing for a dispute over exemptions and other outsourcing for specific industries and special economic zones, with China at the fore.

The Group of Seven Wealthy Industrialized Nations agreed on June 5th to support a minimum corporate tax rate of at least 15% and to share the rights to tax the largest cross-border companies in their countries. Continue reading

But the official communique of the G7 finance ministers made no mention of whether exceptions and exceptions should be made in the ongoing negotiations and left a critical question open.

“If you want to enforce minimum taxation, you could assume that there shouldn’t be any outsourcing because you should be collecting the minimum tax. But that’s not realistic,” said Robert Danon, a law professor at the University of Lausanne.

Countries have long used tax incentives to advance policy priorities ranging from promoting research and development to attracting foreign investment.

Some are now reluctant to abandon these instruments, including China, which has been using low-tax special economic zones for decades to attract foreign investment, which is central to its economic development.

An official briefed on talks said Beijing had “legitimate concerns” about such zones, but China is also offering attractive tax rates to its tech companies, some of which such as Alibaba and Tencent (0700.HK) are based in the Cayman Islands where there is no corporate tax.

Another official told Reuters that China was against the 15% agreed by the G7 and that winning carve-outs was its condition to stay below the rate.

So far, other emerging countries in the G20 have backed the G7, with the finance ministers of South Africa, Mexico and Indonesia supporting the deal in a comment in the Washington Post. Continue reading

“I am confident that in the end we will also reach an agreement with China. Because, as always in such international negotiations, there will be a give and take,” said one negotiator.

So far, Beijing has kept the cards tight. The Foreign Ministry said the G20 finance ministers should address concerns from all sides. Continue reading

TO CARVE

Nearly 140 countries are expected to agree on future rules for cross-border taxation at an online meeting from June 30th to July 1st, before the package is handed 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 draft global minimum tax in October that it could advocate exclusion of mutual funds, pension funds, sovereign wealth funds, government agencies, international organizations and nonprofits.

While this went largely unchallenged, this does not apply to an OECD proposal in the blueprint that international shipping could fall outside the scope of the minimum tax.

Many countries in the European Union are taxing shipping companies based on the carrying capacity of their ships to deter them from registering ships in tax havens, which has helped raise the sector’s average effective tax rate to just 7%, according to calculations by the International Transport Forum at the OECD.

“Shipping nations strongly advocate exclusion, but there are some countries that are against exclusion,” said ITF shipping expert Olaf Merk.

Meanwhile, in parallel talks on how to share the rights to tax excess profits of the world’s 100 largest and most profitable companies, countries must also decide whether there should be any exclusions.

Britain is already looking to exclude its all-important financial sector from technical discussions at the G7, sources familiar with the negotiations said. Continue reading

The OECD’s draft on the taxation of surplus profits, also from October, stipulated that exemptions could be made for natural resources, financial services, construction and residential real estate, international airlines and shipping companies.

Which carve-outs go into a final deal could ultimately determine whether it’s a full or partial game changer for cross-border taxation, Danon said.

“My inclination is that we will likely have something in the middle,” he added.

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