With the foundations for a global tax deal finally laid down by the G7, officials are limbering up for a clash over exemptions and other carve-outs for specific industries and special economic zones, with China at the centre.
The Group of Seven wealthy, industrialised state made an agreement on June 5 to support a minimum corporate tax rate of at least 15% and how to share rights to tax the biggest companies that are in operation across borders in their countries.
But the official communique from G7 finance ministers did not mention whether exceptions and exemptions should be made in broader talks underway, leaving a critical question hanging.
“If you want to enforce minimum taxation, you could take view that no carve-outs should be made because you should impose the minimum tax. But that is not realistic,” University of Lausanne Law Professor Robert Danon said.
Countries have long used tax incentives to advance policy priorities ranging from boosting research and development to attracting foreign investment.
Some are now reluctant to give up those tools, as well as China, which for decades has used special economic zones with low taxation to attract foreign investment, which has been central to its economic development.
One official briefed on talks said that Beijing had “legitimate concerns” about such zones, but China also offers attractive tax rates to its technology firms, some of which like Alibaba and Tencent (0700.HK) are incorporated in the Cayman Islands, where there is no corporate tax.
Another official told Reuters that China wasn’t in agreement the 15% agreed by the G7 and winning carve-outs would be its condition for getting behind the rate.
So far, other G20 emerging market countries are rallying behind the G7 with the finance ministers of South Africa, Mexico and Indonesia backing the deal in a Washington Post op-ed.
“I’m confident that at the end we will also reach a deal with China. Because, as always in such international negotiations, it will be a give and take,” one negotiator said.
So far Beijing has kept its cards close, with the foreign ministry saying that the G20 finance ministers should accommodate the concerns of all sides.