The OECD has announced a far-reaching global agreement to its 'Two Pillar' proposal for international tax reform. The plans, which include a minimum in-country Corporation Tax rate of 15%, have now received the backing of all OECD members including G20 countries and the EU.
As part of ongoing global efforts to tackle large Multinational Corporations (MNCs), often technology companies sheltering profits in low tax jurisdictions, the OECD has followed up the Base Erosion and Profit Shifting (BEPS) initiative, with the 'Two Pillar' approach to global taxation of corporate profits.
- Pillar One targets the profits of MNCs with a 10% or more profit margin and over €20 billion of sales. 25% of all profits in excess of this margin will be allocated to the countries in which these MNCs operate (regardless of taxable presence). This allocation of additional taxable income is intended to be instead of unilaterally applied Digital Services Taxes (DSTs) and is expected to come into force in 2023.
- Pillar Two will be the enforcement of a minimum Corporation Tax rate of 15% applied to the profits in the country where the MNC is headquartered. The MNC will need more than €750 million of consolidated revenues in order to be caught. Local jurisdictions can choose to apply this minimum rate to other smaller, locally headquartered MNCs if they wish. This Pillar is aimed at stopping the use of low tax jurisdictions in corporate structures. Again, 2023 is the expected date for commencement.
This announcement comes after an agreement was finally provided by certain countries which feared for the loss of low tax rates that had historically attracted large MNCs, most notably Ireland. Ireland managed to secure a concession in the wording of the agreement, that saw the removal of the phrase "at least 15%" when discussing the minimum tax rate, amid fears that this rate could be increased in future.
It is anticipated that the scope for global tax planning using competitive tax rates will now be much narrower and countries can compete for MNC tax residency on a more level playing field.
Useful guides on this topic
BEPS & Diverted Profits Tax (for SME owners)
What is BEPS? What is Diverted Profits Tax? Will either of these affect me or my SME clients?
Digital Services Tax
The Digital Services Tax (DST) is a temporary mechanism to tax online sales pending a global solution. How does it work? Who is caught?
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