A small step, however (maybe) an enormous leap for world tax reform: The G7 agrees on a broad framework for the primary and second pillars – taxes

On June 5, 2021, the finance ministers and the central bank
The governors of the G71 countries have published a communiqué to announce it
their agreement on the conceptual framework for a substantial
Revision of global tax policy (the "Communiqué").
The communiqué puts the G7 stamp of faith on the youngest
Efforts by the OECD (supported by a major push by the Biden
Administration) to complete the comprehensive architecture of the
OECD models of the first and second pillars.2 The
Communiqué forms the basis for further negotiations by
the Inclusive Framework (IF) on June 30th and July 1st, followed by
Final negotiations of the G20, which will meet on July 9th and 10th, at
at what point the G7 hopes a final agreement will be reached.

As discussed below, there is still much work to be done to make it more concrete
the details of the frame. In addition, there are significant
Skepticism as to whether a final agreement can be reached
it can be legislated or by multilateral treaty in
the United States and abroad, and whether countries that
enacted (or considering introducing) digital services taxes (DSTs)
and similar unilateral action will find the framework proposed
Generate sufficient income to support their

The 20 paragraph communiqué contains only one paragraph
about taxes, but this paragraph is in relation to that
Agreements made on the first and second pillars. In this legal update
Unwrap this paragraph and give our perspective on what was
agreed and our observations on the remaining questions and whether
they can be solved.

Note: On July 15th we are hosting a
Webinar to discuss these developments and an analysis of
the international tax proposals of the Biden administration, the
complement some of the G7 proposals.

Pillar one and two background

As the OECD under its base. developed their 15 action plans
Erosion and Profit Shifting (BEPS) Initiative, Action 1 was
"Tax challenges from digitization." While
Significant progress has been made on the other 14 action plans
The OECD has recognized that the ubiquitous nature of the digital economy
significant difficulty trying to isolate and
Tax profits related to a digital business separately.

The first work of the OECD on the 14 BEPS action plans
(commonly referred to as "BEPS 1.0") resulted in significant
Changes in the global tax landscape that usher in such new concepts
like DEMPE (development, further development, maintenance, protection,
and recovery) standard in relation to intangible assets,
Country-by-country reporting and rules to prevent hybrid abuse
Companies and instruments.4 However, despite the
Progress based on BEPS 1.0, none of the 14 action plans
had the effect of being a multinational in one
Country in which this company is otherwise not taxable

Many countries have been impatient with the BEPS process and the
no consensus is reached on taxing a digital company. A
Number of countries that have enacted DSTs that impose revenue or others
Gross tax on domestic digital sales. In contrast to BEPS 1.0, the
was the result of a consensus of over 80 countries, this
Taxes are one-sided and vary considerably
World. 5 The United States has a number of
Daylight saving time as discriminatory and has suggested retaliation
Tariffs. 6

In the face of increasing trade disputes and a dissolving consensus
around taxation, the OECD decided to try again
Framework for taxing a digital company. In May 2019 the OECD
announced a work plan around a two-pillar framework, the
(i) create a basis for a new tax law for the market or
Target countries (Pillar One) and (ii) new minimum requirements
Taxation rules to prevent global erosion of the tax base (Pillar Two). The
The two pillar approach became known as "BEPS 2.0". in the
In October 2020 the OECD published its blueprints for both pillars,
adopted by the G20 in December 2020
The OECD has a public consultation process on the final

A breakthrough in the first pillar

The first pillar proposes a new tax law that enables the market
Countries a company in the scope of an assigned part of the
Profit of the company. The allocable portion (amount A) would be a
Part of the company's global profit attributable to the
Land above a routine return based on marketing and
Sales activities (amount B).

One of the biggest challenges in the first pillar is to define an in-scope
Companies. The first pillar should apply to "consumer-oriented"
Enterprise "(CFB) and" automated digital services "
(ADS). In addition to the definition challenges surrounding these
Many companies conduct business both in scope and in terms of conditions
out of reach. As a result, a segmentation mechanism was required
to ensure that only the business in scope was covered by the new one
Right of taxation. As most of the large multinationals
CFB and ADS businesses were run by US multinationals, Pillar
One has been criticized as discriminatory against the United States.

Recognize the challenges in defining a consumer
Business and automated digital services as well as the criticism
that Pillar One discriminated against US tech giants who
The Biden government proposed a change in approach. Rather than
focus on the types of businesses that
lead to a strengthened nexus, she suggested a new approach based on
Size and profitability. Instead of trying to define CFB and ADS,
the new approach basically says that if you are tall enough and
profitable enough, you should pay some taxes in the countries
where you sell your product, whether or not you have one
there taxable presence.

This new approach formed the basis of the agreement of
the G7. The communiqué indicates that the market countries
now the "largest company" on "at." can tax
at least 20% of profit that exceeds a margin of 10%. "In exchange for
The federal states must all abolish this new taxation law

The "largest companies"

It has been widely reported that the G7 expected around 100
Companies meet both size and profitability criteria. With
in terms of size when the Biden administration revised it
Scoping methodology has been reported to be over annual sales
of 20 billion US dollars would be the relevant threshold. For comparison, a
Company ranks 500th with annual sales of $ 20 billion
on the Forbes Global 500 list. A question that needs to be asked
will be addressed when working out the details of the G7 proposal,
Mechanism used to determine which of the "largest"
Companies "are subject to the new tax law for any given
Year as this is not a static year-to-year list.

"At least 20% of the profit"

A key driver of the revised approach is the focus on
Profitability. Only the largest and most
Profitable companies should be within reach. The assumption
The focus on profitability is that of intangibles
Prize winnings, and since intangibles are not physical ones
Link to a market country, another mechanism (i.e. amount A) is
required for a market country to tax the company.

A question that needs to be addressed, given the details of the
The G7 proposal specifies what the profit margins will look like
noted in particular whether they are on financial
Accounting (book) methodology or tax methodology. The difference
An important distinction is made between book income and taxable income
in the development of tax policy and the role of book income
continues to gain importance. In fact, one of the
Suggestions in Biden's tax plan is based on an alternative minimum tax of 15%
Book income as support for perceived corporate tax abuse.

There are numerous material differences between book income and
taxable income, including treatment of stock options. The
Book / tax differential associated with stock option costs is often
the most important position in the reconciliation to the corporate tax rate
and the main reason why effective tax rates are for highly profitable
multinational tech companies are relatively small.

"Over 10% margin"

It should be noted that some of the companies that one
expect to be subject to the new tax law, do not have a total of
Profit margins of more than 10%, although certain segments of theirs
Companies clearly exceed this threshold. During the
Development of Pillar One, a lot of work put into segmentation
Question, namely to determine which parts of a company should be
included or excluded in CFB or ADS and therefore taxable. One of
The criticisms of Pillar One have been its complexity and the need for
Segmentation contributed to this. This complexity will remain
if the G7 is to allow market countries to pay some of the highest taxes
high-profile US technology companies.


An important topic in the development of the last Pillar One
Blueprint was the definition of which industries should be worked out
due to the nature of the industry, how the industry is
regulated or the existence of special tax regulations already in
Place. Extensive analyzes were included in the discussions on the first pillar
which industries should be excluded and the final blueprint
provided natural resources, construction, international
Shipping, financial services, and certain real estate companies
are excluded from the first pillar.

The bidding scoping proposal and the communiqué are silent
on exclusions. But the considerations that formed the basis
the industry exclusions in the Pillar One Blueprint also apply to the print
relevant in the G7 approach, so it would be logical for the same thing
Industries to be excluded under the new model (although the
Exclusion for companies in other industries that are not consumers
Veneering would probably be omitted).

Removal of daylight saving time

An important political prerequisite for an agreement at G20 level
will secure a commitment overriding DSTs. This was a
The linchpin of the first pillar, and a resolution on what daylight saving time will be like
Repeal is essential for consensus to be reached.

The communiqué sees "the elimination of all"
Taxes on digital services and other relevant similar
Measures on all companies (emphasis added
added). ”A threshold problem in this regard is whether DSTs
be repealed entirely or only in relation to the 100
Companies that fall within the scope. At a recent conference, one of the IF
The steering group members made it clear that DSTs need to be lifted in
their entirety.

Another issue is timing of cancellation. As discussed below, even
Assuming the G20 reach an agreement in July, there is still
There is still a lot to be done before the new rules take effect
around the world. It is unlikely that any country will agree
remove daylight saving time before the new rules take effect. As a result,
even if there is an agreement, summer time will still be around for some time.
This could pose another obstacle to concluding negotiations as
Countries may be looking for guarantees against daylight saving time versus
Implementation of any agreement by individual countries.

Second pillar – Global GILTI, Global SHIELD

The overall aim of the second pillar is to ensure that a
the minimum tax rate is paid by a multinational company and
ensure that deductible payments from such companies receive a
Minimum tax rate in the hands of the recipient. The last pillar
Two Blueprint achieved this through a series of complex rules
combine the elements of the US GILTI regime and the SHIELD regime
as proposed by the Biden administration.

The G7 agreement enshrines the goal of the second pillar of
Establishing a global minimum tax rate of at least 15%.
It is important that the threshold of 15% is tested for a tested
country to country to eliminate the ability of multinational corporations
to average high and low tax country profits.

The G7 agreement fits in with the Biden administrative tax
Proposals that would increase the tax on GILTI income to 21%, test
GILTI from country to country and eliminate the GILTI
Advantage for a return of 10% on real assets
qualified business asset investment (QBAI). Besides, the Biden is
Government proposes to reconfigure the BEAT regime by
Deductions to related parties if the recipient or a member of
the group of the recipient is not subject to a minimum level of
Taxation. 7

The Biden proposal uses 21% as the minimum rate for
GILTI. Although the proposed 21% is older than the G7 agreement,
The Biden government recently reaffirmed that it intends to
pursue a rate of 21% in US legislation.8 In
In contrast, the Biden proposal for SHIELD would specifically include the
agreed pillar two rate (i.e. 15%) as the relevant rate
Threshold and only use a rate of 21% if there isn't one

The way forward

The G7 agreement is an important step on the way to
global tax reform. But however important this step is, there is only one
implementation by many before global consensus is reached
The framework is agreed and the new rules are in effect around the

It is checked whether the revised Pillar One
Rules can be implemented through a new multilateral instrument
(MLI) and, if so, whether countries will participate. It should be
noted that the United States is the current
BEPS MLI, prefers bilateral tax treaty negotiation
just. If the United States takes the same approach in terms of
a new MLI, it may take some time before the new rules apply
to US-based multinational corporations, particularly considering the US
The Senate's Recent History with Tax Treaties
Ratification. In addition, the United States and many others
Countries need to change national laws and treaties
which could raise a multitude of implementation problems and

As mentioned earlier, the next step is to continue negotiations through the 139th
IF members on June 30th and July 1st. When agreement is reached
there the proposal goes to the G20 for approval at their meeting
on July 9th and 10th.

Please attend our webinar on July 15th where we
discuss these developments and the results of the G20 meeting.


1 Canada, France, Germany, Italy, Japan, the United
Kingdom and the United States.

Tax challenges posed by the digitization of the economy: The OECD
Secretariat proposal for "Pillar
One "(Oct. 2019);
Mayer Brown responds to OECD Pillar 1 consultation, Pillar
Two on the way (Nov. 2019);
OECD is taking important steps to further develop the first pillar, progress noted
to the second pillar (Feb. 2020);
Mayer Brown reacts to the newest pillar two of the OECD
Advice (Dec. 2020).

3 See
Hitching Biden's corporate tax proposals for global tax
Train (taxnotes.com).

4 See
DEMPE functions (Dec. 2020);
OECD publishes implementation package for country-specific reporting;
US implementation unclear (June 2015);
IRS Publishes Proposed Anti-Hybrid Regulations (Jan.

5 At its inaugural meeting in Kyoto, Japan in 2016, there was
were 82 IF members, today there are over 135

6 See
US starts trade investigation into taxes on digital services in
Several countries (June 2020).

7 See
Déjà Vu again: Life sciences companies cling to it
for more US and global tax reform (April 2021).

8 Statement by Secretary Janet Yellen to the US House of
Representatives, Committee on Means and Ways, June 17

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