In a 13 June communique, the leaders of the Group of Seven (G7) endorsed the " historic commitment" made by G7 finance ministers the week prior towards an equitable solution on the allocation of taxing rights. In addition to locating tax burdens for the largest and most profitable multinationals in their countries of operation rather than just where they are headquartered (Pillar One), the member states also committed to a global minimum corporate tax rate for multinationals of at least 15% (Pillar Two). The ministerial communique targets the July G20 finance ministers and central bank governors meeting to reach an agreement on the Pillars.

TheUnited States to push for a new global tax regime.

Despite maintaining US threats of new tariffs if European countries pursue unilateral digital service taxes, the US administration has signaled that it will continue to push for a new global tax regime, both to access an estimated USD533-billion revenue stream and as another opportunity to bolster US relations with major European allies, such as France and Germany. It has already agreed to discuss removing existing US tariffs on aluminum and steel and postponed imposing substantial sanctions on the construction of the Nord Stream 2 pipeline. With such moves, the administration hopes to encourage EU states to support other US foreign policy priorities. Furthermore, it wishes to demonstrate to US allies that the US has recommitted to taking a leadership role in setting international standards and that it is also amenable to offering compromises to resolve existing international disputes. Although the administration is likely to join a newly negotiated international tax pact, getting US congressional ratification for its implementation will be challenging, especially in the event that congressional lawyers deem the new agreement a treaty, which would necessitate a two-thirds majority.

Full EU buy-in for the G7 plan to face internal obstacles.

Internal EU disputes on corporate tax issues remain unresolved by a new European Commission corporate tax plan published in May, or by member states' needs to find additional revenues to cover raised state spending and accelerate economic recovery. The four G7 members in Europe already levy corporate tax at well above 15%: France (28%), Germany (29%), Italy (27%), and the United Kingdom (19%; which also intends to raise that to 25% from 2023). However, there are clear asymmetries among EU member states. While corporate tax rates range as high as 31.5% in Portugal, Ireland currently taxes corporate profits at 12.5%, and Hungary at only 9.0%. Ireland has used its low corporate tax regime as a key incentive to encourage firms to locate there. The risk of losing attractiveness as an investment destination implies that Ireland and Hungary are unlikely to support the G7 initiative in its current format. Since the European Union needs a unanimous rather than a qualified majority to pass new tax legislation, achieving the necessary EU unanimity is unlikely unless a compromise can be found.

Although the G7 has targeted reaching an agreement at the G20 finance ministers meeting in July, it is likely to roll over to the October G20 Summit in Rome, where digital taxation will also probably be high on the agenda.

That latter meeting is likely to be crucial to recruiting countries from outside of the "global north" and smaller non-G7 economies to support global arrangements for the taxation of multinationals. The support of some of those countries will be critical to any possibility of positively influencing Russia and China, which have corporate tax rates of 20% and 25%, respectively, and which will probably view the standard-setting initiative in geopolitical terms as an attempt to push back against their influence globally.

The G7's proposed minimum global tax is likely to have limited implications for Latin America given the region's high levels of corporate taxation.

Except for offshore tax havens in the Caribbean and Paraguay (10% tax rate), corporate taxation in the region is well above the proposed 15% global tax. Also, such a minimum global tax will not bring benefits through other channels; for example, the region is not home to major multinationals that seek to exploit low taxation jurisdictions, as is the case with the US and the European Union. In principle, a fixed global tax would reduce the scope of tax competition among countries seeking to attract foreign direct investment; however, as the rate will be well below the average 27% corporate tax in Latin America, the impact is likely to be neutral.

Posted 28 June 2021 by Carlos Caicedo, Senior Principal Analyst, Latin America Country Risk, S&P Global Market Intelligence and

John Raines, Principal Global Risks Adviser and Head of North America, Economics & Country Risk, S&P Global Market Intelligence and

Laurence Allan, Head of the Europe/CIS Insights and Analysis, S&P Global Market Intelligence