G20: world leaders agree on common digital tax, fail to agree on climate talks

Article
Niccolò Giusti
G20

The G20 is the international forum bringing together since 1999 the world’s major economies. Together, these countries account for more than 80% of world GDP, 75% of global trade and 60% of our planet’s population. Since 2008, the Forum has held a yearly Summit with a large number of institutional meetings and ad hoc events to debate the major issues on the global agenda. The Italian G20 Presidency, that began in December 2020, hosted this month a series of summits on two pressing issues for international diplomacy – global digital taxation and speeding up efforts to combat climate change.

Global tax deal. In the past few years, the international community has been trying to reform the international tax system to address the digitalisation of the global economy. The main aim of this reform is to stop multinationals from shifting profits into tax havens. At EU level, it is also one of the priorities of the Von der Leyen Commission. Negotiations, under the umbrella of the Organization for Economic Cooperation and Development (OECD), have been ongoing since May 2019. Following initiatives at national level in countries such as France, one the strongest advocates for an international tax on multinational companies, discussions have recently gained significant momentum.

At their meeting on July 9-10 in Venice, G20 Finance Ministers clinched a deal for a global tax reform. The deal, rubber-stamped by 130 countries, aims to introduce at international level a tax on multinational companies while setting a global minimum tax rate of at least 15%. It also plans to shed light on tax revenues shared among countries by multinational companies making profits in other countries where they do not have a physical presence, something which especially targets digital companies.

Despite the general agreement, the details and technicalities of a global tax still need to be defined and agreed upon by the G20 members. One of the pressing issues is the degree to which the global tax would replace levies such as, for instance, the European Commission digital tax, expected to come into force in 2023. It is one of the measures the EU executive plans to use to pay back the Next Generation EU (NGEU) fund created to finance the bloc post-pandemic recovery. The new EU digital levy initiative could potentially include a corporate income tax top-up to be applied to all companies conducting certain digital activities in the EU, a tax on revenues created by certain digital activities conducted in the EU, and/or a tax on business-to-business digital transactions in the EU.

Nonetheless, despite this scenario of international convergence on global taxation and a renewed European-American cooperation, the United States are pressuring the Commission to drop the digital levy, arguing it would hamper work reached with G20 leaders and discriminate against U.S. companies. The EU executive, originally expected to present its digital levy in mid-July, has currently put the proposal on hold to ease G20 negotiations. Another question that could slow down the way towards a final agreement is the unanimity voting principle in EU taxation policy, as EU countries such as Ireland, Hungary and Estonia currently oppose the digital levy.

Failure in climate talks. On July 23, G20 climate, energy and environment ministers met in Naples to discuss raising the climate ambitions, but failed to agree on key commitments to climate change. G20 Ministers could not agree on two sensitive issues. One concerns the phasing out of coal-produced energy, with most countries pushing to fix 2025 as the end-date, while other nations with more carbon-dependent economies such as China, India and Russia, claim it would entail excessive transition costs for them. As a result, a final communiqué released on Sunday July 25 contained no mention of coal, oil or gas, or the need to phase out fossil fuels.

The other contested issue is on the wording surrounding a 1.5-2° Celsius limit on global temperature increases by the end of the century, set by the 2015 Paris Agreement. However, China and India refused to agree to limit global warming by 1.5° over the 2° target previously agreed on in Paris. This summit was seen as decisive ahead of the United Nations’ talks, the COP26, set to take place this November in Glasgow, where world leaders are expected to try and reach a renewed accord on climate change. The lack of agreement was also received with discomfort at EU level, where Member States and lawmakers had managed to clinch a deal in April on the so-called “Climate Law”, increasing emission reduction targets to at least 55% in 2030, compared to the 1990 levels.

Italy, which chaired the two-day summit, highlighted a common understanding in the need to boost green finance, moving towards a more sustainable economic recovery and increasing the use of renewable energy. At the same time, the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) entered its final stretch on Monday July 26. Its most awaited part, which summarises the latest scientific knowledge on climate change, was written by 230 experts from 60 countries dating up to last spring. It is now up to the 195 United Nations’ to study and approve this document of several thousand pages in the coming weeks. Subject to their approval, the Report is set to be released on August 9.

G20 leaders will now have to discuss these issues in Rome on October 30-31, the culmination of the Italian Presidency. On the one hand, they will need to finalise the details of the agreement on global tax reform reached in Venice, while, on the other hand, try to find an accord on the two most pressing issues in the fight against climate change. This will inevitably add significant pressure on future negotiations.