G7 paves the way for significant global tax change

24 July 2021

The communique issued on 5 June 2021, following the meeting of the G7 finance ministers in London signals another potentially significant shift in the global tax landscape to address the tax challenges arising from globalisation and the digitalisation of the economy. At that meeting, the group committed to the principles of an equitable allocation of taxing rights between jurisdictions and a global minimum tax rate.


The OECD has been charged in recent years with taking the lead on developing solutions in these areas and it is the blueprint of the OECD’s two pillar approach on the taxation of the digital economy which has now been agreed in principle   by the G7. The Pillar One and Pillar Two proposals arose out of the 2015 base erosion and profit shifting (BEPS) Action 1 report issued by the OECD, and whilst there have been various actions arising from this report over the last five years, the communique issued by the G7 has really breathed fresh life into achieving consensus on this project. A firm timeline for achieving these commitments, however, is noticeably absent from the communique. 

The G7 commitments

1.  The allocation of taxing rights between countries – Pillar One

In general terms, the communique confirms that the G7 aims to use the blueprint of Pillar One, by allocating a proportion of profits of the largest multinational businesses   to be taxed in the markets where their customers are based. 

These principles, when first outlined by the OECD, proved to be highly sensitive, particularly in the United States during the Trump presidency. Furthermore, several jurisdictions, including the UK, broke ranks and introduced domestic digital services taxes, with the aim of protecting their respective tax bases. The introduction of digital services taxes may have helped to force the issue, but it was the Biden administration that provided fresh impetus for this discussion by proposing an approach that, whilst agreeing the principle of global minimum tax rates in Pillar Two, also expanded the Pillar One focus from the digital sector alone to all business sectors  . The proposals are, however, tied to the repeal of all domestic digital services tax legislation.  

There is clearly significant work to be done to refine the very high-level basis of agreement set out in the communique, but it is nonetheless a significant step that could bring about a unified global approach to what has been a deeply divisive issue.

2.  Global minimum taxation – Pillar Two

The Pillar Two blueprint hinted at a minimum global tax rate of around 12.5 per cent, whereas the communique the G7 issued has gone further, to ‘commit to a global minimum tax of at least 15 per cent on a country by country basis’, albeit lower than the 21 per cent suggested in the initial Biden proposals. This announcement aims to ensure that in scope businesses are subject to a minimum level of tax, irrespective of where they operate.  Corporation tax is already set at a rate of 19 per cent in the UK and is due to rise to 25 per cent in 2023. Given the proposition of a global 15 per cent minimum tax rate means there may be continuing (and from 2023 increasing) opportunities for in scope businesses to achieve tax benefits from locating activities in lower tax territories, it will be interesting to see the impact on UK tax revenues over the next few years whilst HM Treasury is tasked within maximising tax receipts to recover the costs of the pandemic.

What next?

Subsequent to the G7 finance ministers meeting in June, the OECD has proposed a global revenue threshold of €20bn for Pillar 1, whilst the G20 meeting in Venice on 9 and10 July saw the G20 finance ministers pledge their full support for the global tax agreement and call for outstanding design issues to be swiftly addressed by the OECD, and for a detailed implementation plan to be available by October.  These high-level commitments are therefore likely to become the basis of more substantial announcements later this year, with the aim of driving consensus amongst the 139 jurisdictions that comprise the OECD Inclusive Framework and with new legislation only likely to be addressed by national governments once consensus has been reached.

For more information please get in touch with Suze McDonald.