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G-7 Leaders Pledge to Seek Consensus on Taxing Digital Economy

POSTED ON Jun. 12, 2018

Despite flaring trade tensions fanned by tweets from President Trump, G-7 leaders could at least agree on one thing — finding a consensus-based solution to tax the increasingly digital economy by 2020.

In their communiqué, published at the end of the June 8-9 summit held in the Charlevoix region of Quebec, the leaders of the G-7 nations reiterated their support for international efforts to ensure “fair, progressive, effective, and efficient tax systems.” The group also vowed to continue fighting tax evasion and avoidance by implementing international standards and addressing base erosion and profit shifting.

Leaders also acknowledged one area of tax in which further work is needed. “The impacts of the digitalization of the economy on the international tax system remain key outstanding issues,” the communiqué says, adding that the leaders welcomed the OECD’s interim report on the topic. “We are committed to work together to seek a consensus-based solution by 2020.”

The OECD had followed up on its 2015 action 1 report of its BEPS project with an interim report, published on March 16, which described countries’ differences of opinion on the subject while also attempting to lay a foundation for reaching a long-term, consensus-based solution by 2020.

The communiqué also included a paragraph on trade, in which the leaders acknowledged that “free, fair, and mutually beneficial trade and investment, while creating reciprocal benefits, are key engines for growth and job creation.” In particular, the leaders emphasized the importance of a rules-based global trading system and their intent to fight protectionism.

However, trade was a particularly contentious topic in the days leading up to the summit, thanks to Trump’s May 31 announcement that his administration would impose trade penalties of 25 percent on imported steel and 10 percent on imported aluminum. While the administration reached agreements with several of its key trading partners to exempt them from the tariffs, it failed to reach agreements with Canada, the EU, and Mexico by a June 1 deadline.

Canada, in particular, hit back immediately, announcing that Canada would impose $16.6 billion of retaliatory duties on American steel and aluminum products, effective July 1.

After the summit, Canadian Prime Minister Justin Trudeau reaffirmed his government’s opposition to the U.S. tariffs. “It’s not something we relish doing but it’s something that we absolutely will do,” Trudeau said. “Canadians are polite, we’re reasonable, but we also will not be pushed around.”

After leaving the summit early on June 9, Trump lashed out in response, tweeting that Trudeau’s comments were “dishonest and weak” and saying that the U.S. tariffs are in response to Canada’s 270 percent tariff on U.S. dairy.

“Based on Justin’s false statements at his news conference, and the fact that Canada is charging massive Tariffs to our U.S. farmers, workers and companies, I have instructed our U.S. Reps not to endorse the Communique as we look at Tariffs on automobiles flooding the U.S. Market!” Trump tweeted.

It was unclear at press time whether the United States was in fact rescinding its support of the communiqué. The White House did not respond to Tax Analysts’ request for comment. The G-7 press office under the Canadian presidency also did not comment further, only referring Tax Analysts to the text of the communiqué and to the White House for more details.

In spite of the sparring between Trudeau and Trump after the summit, the substance of the communiqué still stands, according to John Kirton, director of the G-7 and G-8 Research Group, which is based at Trinity College and the University of Toronto's Munk School of Global Affairs.

Kirton said noted that the Think7 (T-7), a summit of academic institutions and think tanks from the G-7 countries, in which he participated, had also produced a declaration that recommended to G-7 leaders 17 proposals to address global governance and the challenges of complexity and inclusiveness. Those included two proposals for leaders to consider to ensure fair tax systems: a global minimum corporate tax rate and identifying and taking opportunities for sustainable growth through global tax cooperation.

Kirton said he was pleased to see that the G-7 had listened to the T-7 and that tax was in the third paragraph of the communiqué. “Even though it was a paragraph, it has a pretty prominent placement,” he said, noting that each word of such documents as the G-7 communiqué is carefully chosen by those who draft them.

Kirton highlighted the part of the paragraph on finding a consensus-based solution for taxing the increasingly digital economy as being beyond the usual boilerplate. That part shows that taxation of the digital economy is an issue “that’s just at the early stage of becoming prime time” at the G-7, he noted. “It was one of those issues where they all stand together,” Kirton said. He added that the leaders seem to acknowledge that they all must think the issue through together and “do their homework” on the topic, using the best analysis from the OECD, whose members include the G-7 countries. Kirton also noted that the United States will hold the G-7 presidency in 2020.

Indeed, the debate is now focusing on the core of international tax rules, as countries have agreed to review nexus and profit allocation rules, according to Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration. “Without consensus on these tax rights, the international landscape risks deep fractures that would be painful, difficult and costly,” he wrote in an article for G-7 Canada: The 2018 Charlevoix Summit, the G-7 Research Group’s official publication. 

“It is therefore important to keep the global community together to face the important challenges ahead,” Saint-Amans wrote, adding that the G-7 “can serve as a building block for a consensus-based solution.”