G7: Deal on Digital Taxation

Published on July 18, 2019

US Treasury Secretary Steve Mnuchin flew to the G7 meeting in Chantilly, France, hell bent on neutralizing French President Emmanuel Macron’s threats to levy a 3% tax on revenues earned in his country by mega-tech companies that, of course, happen to be US-based.

** In a major shift to the existing taxation system, the finance ministers and central bank governors of the G7 countries tentatively agreed today to tax digital companies on the basis of where they derive income, as opposed to their headquarters and domicile, or phrased differently, on their digital, and not just physical presence.

** In practice, while this should help line the coffers of those countries with the larger user bases, it would also seem to pose a threat to the competitive advantages historically enjoyed by low tax domiciles like Luxembourg, Ireland, or the Netherlands where many of the largest high-tech companies set up divisions for purely tax reasons. None of these domiciles, funny enough, are directly represented by the G7.

** While the details and thus impact of this agreement will not immediately be clear, the G7 financial leaders, from what we understand, have set a target of December 2019 for the Organization for Economic Cooperation and Development (OECD) to come up with details on how to levy the tax. The plan, then, is to have G20 leaders endorse the new system by their November 2020 meeting in Saudi Arabia.

** What we do hear as far as details is that the tax is likely to be based on the US GILTI (Global Intangible Low-Taxed Income) regime. While we are not sure what exactly that means, our understanding is that it assumes a 10.5% tax rate, which certainly sounds like a material tax hike from what these tech companies have enjoyed to date.

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