OECD agrees ground-breaking tax settlement for the global economy
On Friday 8 October 136 countries and jurisdictions, representing 90 percent of global GDP, have reached an agreement on a major reform of the international tax system. The goal of this reform is to reduce base erosion and profit shifting (BEPS) and to provide a framework to support multinational corporations to pay taxes where their profits are generated rather than where their headquarters are located.
This announcement follows the release of a July statement signed by more than 130 countries, which has now been ratified with some amendments.
Estonia, Hungary, and Ireland who had some reservations have now joined the agreement. The agreement now has significant global support having been endorsed by all OECD and G20 countries and 136 out of the 140 members of the OECD/G20 Inclusive Framework. Kenya, Nigeria, Pakistan, and Sri Lanka are the only four nations that have yet to sign up to the deal.
techUK welcomes the agreement having long advocated for a multilateral solution for the taxation of the globalised digital economy. This is a significantly more effective way to tax companies in the modern economy versus national digital services taxes which have resulted in serious trade disputes, have not resolve profit shifting and penalise companies for achieving growth by utilising digital services.
What was agreed by the OECD?
Countries and jurisdictions have agreed to join the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy. This statement provides a multilateral tax solution based on two pillars:
- Pillar 1: The largest and most profitable companies, with at least a 10% profit margin and sales above €20bn; would see 25% of any profit above the 10% margin allocated to market jurisdictions. Therefore, these companies will be required to pay taxes in the countries where they have operations. This pillar also includes a series of additional measures, among the most prominent is the removal of national digital services taxes (DST).
- Pillar 2: Proposes a global minimum corporation tax of 15% which will operate on a country-by-country basis.
According to the OECD, under pillar one, taxing rights on more than USD 125 billion in profit are projected to be reallocated to market jurisdictions each year. In addition, the new minimum tax rate set out in pillar two is expected to produce an extra USD 150 billion in global tax revenues each year. Additional advantages will accrue as a result of the international tax system's stabilisation and greater tax certainty for taxpayers and tax administrations.
The statement signed on October 8 differs the previous July statement, this was due to Irish opposition to the initial proposal of establishing a minimum tax rate of "at least" 15 per cent. The October 8 version no longer includes "at least" in final wording with the minimum rate now being an exact 15%. This rate will be applied to multinational corporations with annual revenues exceeding 750 million euros. The proposal of Pillar one also saw some modifications as the threshold was set at 25% of any profit above the 10% margin allocated to market jurisdictions, while previously a range of 20 to 30 per cent was established.
What are the next steps for this reform?
According to the OECD, countries intend to sign a multilateral convention in 2022, with effective implementation starting in 2023. This convention will serve as the vehicle for implementing the newly agreed taxing right under Pillar One, as well as guideline for removal provisions for existing Digital Service Taxes and other similar relevant unilateral measures, which will provide more clarity and aid in the reduction of trade tensions.
During 2022, the OECD will develop model rules for bringing Pillar Two into domestic legislation, to be effective in 2023.
Due to the incorporation of Hungary, Estonia, and Ireland to the agreement, the EU now has the necessary unanimity from its 27-member bloc to turn the accord into EU common law. However there are concerns that Joe Biden’s administration will not be able to pass this legislation in the US Congress. Nonetheless, US Treasury Secretary Janet Yellen stated that she is "confident" that legislation to enact the reform will be passed and that they will be able "to reassure the world that the United States will do its part."
The two-pillar solution will be delivered to the G20 Finance Ministers meeting in Washington D.C. on 13 October, then to the G20 Leaders Summit in Rome at the end of the month, for ratification.
techUK will continue to closely monitor the debate on multilateral taxes for the digital economy, working closely with the OECD and the UK government to provide input and feedback from our members.
If members have further questions about techUK’s tax work, please reach out to [email protected]