G7 Tax: Busting the Myths

The G7 and OECD are working on the next iteration of BEPS, designed to tackle perceived issues, particularly around multinational taxation. In our July 2021 customer forum Tom Cowsill, Tax Director at PwC, joined us to highlight some common misunderstandings.

Here we highlight some of Tom's key points, but you can also watch his full presentation below.

Tom started by highlighting that digitalisation has provided a huge number of benefits within financial services, but it has also provided tax challenges for the economy. The primary driver is because of multinational enterprises taking advantage of gaps in tax systems from country to country. To tackle this, the BEPS 2.0 project has two pillars:

Pillar 1 provides more taxing rights and profit allocations to the user or customer jurisdictions, independent of physical presence. It focuses on the largest 100 global companies, but with exclusions for regulated financial services and extractives.

Pillar 2 has the Global Anti-Base Erosion (GloBE) proposal which is designed to counter any remaining concerns in relation to BEPS ensuring that multinational enterprises (MNEs) pay a minimum level of tax of at least 15% at a jurisdictional level.

These pillars seem simple enough, but have these caused some crossed wires?

Tom discussed in our recent forum the misunderstandings that he has encountered with the BEPS pillars and helped bust the myths surrounding the pillars.

One of the misunderstandings he highlighted is that many believe only technology corporations are in scope. The scope, however, goes beyond tech giants. Revenue and profitability thresholds apply but the tech giants are usually included in pillar 1. It is pillar 2 that has a much broader scope for all MNEs.

Under pillar 1 states that regulated financial services are excluded, but does this mean that financial services are totally exempt as many believe? The exemption only applies to pillar 1, and not pillar 2, with pillar 2 only excluding, for example, pension and investment funds.

The final misunderstanding is that proposals require the end of zero and no tax regimes. Pillar 2 does not require each participating jurisdiction to introduce a minimum corporate tax rate of 15%. This means that low/no tax jurisdictions will monitor changes and await the final rules before being sure that they will need to implement this minimum tax rule.

While the signing of the G7 tax agreement took place in June, there is much work yet to be done and these are only the initial agreements. As of 9th July 2021, 132 member jurisdictions have agreed to the Two-Pillar Solution for the BEPS 2.0 project which has endorsed this stance against the tax challenges caused by digitalisation. It's now that the detailed work starts to happen.

Watch Tom's presentation in full to see more detail and understand what to expect over the next few years.