G7 finance ministers and central bank governors have expressed support for enforcing at least a minimum level of effective taxation on multinational enterprises (MNEs).
In their conclusions after their July meeting, they placed a special focus on tax avoidance connected to transfers of intangible assets and saw merit in the US's response to such in introducing its "GILTI" regime.
To prevent base erosion, the 2017 US tax reform legislation introduced a new regime in Section 951A of the US tax code for the taxation of global intangible lowed-taxed income (the GILTI regime).
The aim of the GILTI regime is to complement existing US international tax provisions to capture within the US tax net certain income of foreign companies that are controlled by US shareholders (CFCs) where it would otherwise be subject to very low or no tax overseas.
The new GILTI regime's design is somewhat complex. However, its objective is simple: it is intended to ensure that high-value intangible assets, such as intellectual property rights, that are shifted overseas from the United States to low-tax territories are subject to at least a minimum level of US tax.
GILTI is a new category of foreign source income that is added to a group's US taxable income each year. GILTI is subject to a minimum tax rate of between 10.5% and 13.125%.
The regime is similar to efforts by the European Union, which are also aimed at preventing companies from avoiding tax by shifting intangible assets situated in an EU member state out of that state before they generate income.
The EU's new exit tax, which member states must implement by 1 January 2020, is intended to enable a member state to tax the value of the product before the intellectual property is shifted overseas (typically to a low-tax territory).
A taxpayer will be subject to exit tax at an amount equal to the market value of the transferred assets, at the time of exit of the assets, less their value for tax purposes. A taxpayer satisfying certain conditions may defer payment of the exit tax and pay it over a period of five years.
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The International Monetary Fund highlighted the benefits of such measures in a paper released in March 2019.
This paper looked at international tax policy responses to increase the amount of tax paid by multinationals, including through such measures as the US's base erosion anti-abuse tax (BEAT) and the aforementioned GILTI regime.
The IMF noted that:
"minimum taxes on outbound investment can offer significant though incomplete protection against profit shifting and tax competition and generate positive spillovers for other jurisdictions (other than those with low-tax regimes)."
It also discussed proposals at EU level to divide a multinationals' taxable income among member states based on factors such as turnover, sales, and employment, under its relaunched Common Consolidated Corporate Tax Base proposal.
The IMF paper notes that
"such schemes can substantially reduce profit shifting.”
The communique at the end of the G7 meeting agreed on the need for minimum taxes, with ministers agreeing:
“that a minimum level of effective taxation, such as for example the US GILTI regime, would contribute to ensuring that companies pay their fair share of tax. The tax level to be set would depend on concrete design features of the rules."
"The G7 looks forward to further progress in the context of the G20 and a global agreement on the outlines of the architecture [for new international tax rules, including for the digitalised economy] by January 2020 at the level of the Inclusive Framework on BEPS."
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