A quick overview of the changes the recent OECD/G20 global tax deal is likely to bring in the future.
Governments around the world lose US$245 billion every year in corporate tax to tax havens, according to the London-based Tax Justice Network advocacy group.
The OECD anticipate that the agreement on the OECD/G20 Inclusive Framework on BEPS (Base Erosion Profit and Shifting) will bring in US$150 billion per year globally.
The taxation of corporations has become increasingly controversial in recent years, with some countries seen to be enticing large companies into their low-tax jurisdictions. There are straightforward economic arguments driving the agenda for global corporation tax reform, including age-related societal pressures, Covid-19 recovery issues and the climate change agenda.
Existing tax laws and the nexus and profits attribution rules were designed to deal with traditional business models. The imperative now is to ensure a "fit for purpose" global tax system is developed to address how the digital economy is taxed.
Working within the OECD/G20 Inclusive Framework, 141 countries and jurisdictions have collaborated to tackle tax avoidance and improve international tax rules, resulting in two reports: The Pillar One Blueprint and The Pillar Two Blueprint.
Pillar One seeks to reallocate the taxing rights of more than US$125 billion of profits generated by certain multinational enterprises (MNEs), from their home countries to the markets where they have business activities and earn substantial profits (regardless of physical presence).
The reform aims to capture the largest and most profitable MNEs - those with an annual global turnover of over €20 billion and profitability above 10%. However, the extractive industry and regulated financial services are currently excluded from the scope of Pillar One.
It has three components:
- A new taxing right for market jurisdictions over a share of residual profit calculated at an MNE group (or segment) level (Amount A).
- A fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction, in line with the ALP (Amount B).
- Processes to improve tax certainty through effective dispute prevention and resolution mechanisms.
Pillar Two aims to set a floor to excessive tax competition, aiming to ensure that companies with a certain level of turnover will pay a minimum effective tax rate of 15%. It also includes a common set of rules on how to calculate the effective tax rate, so that it is properly and consistently applied.
This is expected to raise about US$150 billion in annual global tax revenues.
The agreement on Pillar One and Pillar Two tax reform is a global consensus-based solution to an international problem. 137 of the 141 countries have signed up to the agreement.
It is intended that the new rules will apply globally by the beginning of 2023. The G20 published a report containing a detailed implementation plan proposing that Pillar One be introduced via a multilateral convention, and Pillar Two be implemented through domestic legislation based on OECD model rules.
For accountants and finance professionals the global agreement will have significant implications, with wealthy countries set to be the biggest beneficiaries of the deal.