Can a global minimum tax survive Trump?
As the G7 exempts the US from the global minimum tax – otherwise known as Pillar 2 – experts are asking when a global tax stops being global? Say Tim Sarson
Last month I opened this column talking about an announcement from the German government about a proposal to cut their federal corporation tax rate. Unbelievably, the Germans have given us another important piece of news to talk about in just a matter of weeks after their Chancellor asked the EU to suspend implementation of the global minimum tax.
The G7 countries recently agreed to exempt US-parented corporations from the measure, known as Pillar 2, following months of pressure from the Trump administration and the threat of some retaliatory international tax measures in its so-called ‘One Big Beautiful Bill Act’.
The US government heralded this deal as a big victory. In the zero-sum thinking that’s taken hold of international politics in recent years, that must surely mean that somebody somewhere caved. The German Chancellor certainly seems to think so. He argued that the new cohabitation arrangement puts European businesses at a competitive disadvantage to their US counterparts. “The Americans have withdrawn, and this concept no longer has a future”, he pronounced.
Now, remember, Germany is governed by a coalition. So, a couple of days later, up popped the Social Democratic Party’s finance minister to insist the country remains committed to Pillar 2 after all.
So, it’s now a fair question to ask, when something that was billed as a global minimum tax stops being global?
It seems the old multilateral, rules-based order is under fire again. Could this much-heralded transformation of the way international taxation works be heading for the buffers? Or is it perhaps going the way of other erstwhile pillars of multilateral consensus, like the World Trade Organisation agreements or the NATO principle of collective defence, hobbling on into a new reality, weakened but still alive to fight another day?
Certainly, many people in the tax world are unhappy with the state in which we find ourselves. The US Global Intangible Low Taxed Income or regime (its own version of a minimum tax) and Pillar 2 are now intended to sit side by side. The problem is that they are not entirely equivalent. Some European companies look at their peers over the Atlantic, see lower effective tax rates and bristle a little. There are technical reasons for the gap that I won’t go into here, but they do relate at least partly to the way in which the US regime treats the profits of foreign affiliates. There are, however, also long-standing differences in corporate culture and tax authority practice that Pillar 2 probably wouldn’t have eliminated.
The bigger issue for most businesses I talk to is that complying with the new rules is already taking up vast amounts of time and effort, often with the net result of no extra money for the taxman. That will only get worse as the transitional regime we’re in now ends and taxpayers have to start complying with the full-fat computational rules.
What’s next?
Here’s where things stand: Pillar 2 is a big undertaking for the largest companies. It is unlikely to raise a huge amount for most governments. The Americans are out and have been given a bye on the measure that was designed to tackle situations where countries don’t sign up to the rules. Oh, and China and India haven’t signed up either and show no indication of doing so. Pillar 2 has become, like those other examples of the multilateral rules-based system, an increasingly exclusive members’ club for medium sized, liberal economies.
Why, then, should those remaining countries plough on with a measure that would seem to punish their national champions while exempting the competition? I think there are two main reasons.
There’s still time to pull back from the worst of the bureaucratic storm that’s due to hit our largest companies in the next three years
The first is inertia: the global minimum tax had momentum; it’s already on the statute books of most of its adherents, and it is expected to bring in some handy extra pocket money for governments. Dropping it altogether would look like failure and would deny its proponents any form of closure.
The second reason I expect Pillar 2 to survive in some form is that it remains in principle a rather neat idea, and it’s already been successful. Dozens of low or zero tax countries have adjusted their legislation to bring in top-up taxes, ensuring that the lowest rate you will pay in their country is 15 per cent. These top-ups act as a preventative measure. Dismantle Pillar 2 completely and that state of affairs may not last.
So I think Pillar 2 lives to fight another day. But it needs to shape up because it now has American competition. There’s a window of opportunity for governments to rethink how they implement it, and I hope they do. There’s still time to pull back from the worst of the bureaucratic storm that’s due to hit our largest companies in the next three years. Perhaps that will be enough to cheer up the Bundeskanzler (aka the German Chancellor).
Tim Sarson is head of tax policy at KPMG