After years of negotiations, the OECD announced on 8 October 2021 that 136 countries (out of 140 members of the OECD/G20 Inclusive Framework on BEPS) had reached agreement on a sweeping overhaul of the international tax system that will impose a 15% minimum tax rate on certain multinational enterprises (MNEs) and reallocate more than USD 125 billion of profits from approximately 100 of the world’s largest and most profitable MNEs to countries worldwide.
The OECD released an eight-page statement that updates its 1 July blueprint and includes an annex that provides important details regarding implementation of the agreement. The new statement follows the outline of the original global tax reform plan: a two-pronged framework, with Pillar One addressing taxing rights and distribution of profits and Pillar Two the imposition of a global minimum tax.
On 13 October, the G20 finance ministers released a communique following their meeting in Washington, endorsing the key components of the two pillar approach to the reallocation of profits of MNEs and a global minimum tax. The G-20 leaders endorsed the plan on 30 October during the Leaders’ Summit—the final step in the process of adoption of the agreement by the international community.
Pillar One will achieve a fairer distribution of profits by reallocating some taxing rights from an MNE’s home country to market jurisdictions where it has business activities and profits, regardless of whether the firm has a physical presence in those jurisdictions.
Pillar One will apply to MNEs with global turnover above EUR 20 billion and profitability above 10%. That threshold could be reduced to EUR 10 billion upon review seven years after the agreement enters into force.
A new special-purpose nexus rule will be introduced to permit the allocation of a share of the residual profit—Amount A—to market jurisdictions where an in-scope MNE derives at least EUR 1 million in revenue. In the case of smaller jurisdictions with GDP lower than EUR 40 billion, the nexus threshold will be EUR 250,000.
The 1 July 1 statement had left open the question of how much residual profit would be subject to the new reallocation rules, estimating that between 20% and 30% of profit in excess of 10% of revenue would be allocated to market jurisdictions that meet the nexus test. The October statement clarifies that 25% of residual profit will be reallocated.
The new statement confirms that in-scope businesses will benefit from mandatory and binding dispute prevention and resolution mechanisms designed to avoid double taxation for Amount A, including all issues related to Amount A (e.g., transfer pricing and business profits disputes). The July statement had left open the possibility of introducing an elective binding dispute resolution mechanism for Amount A issues that would be available only to some developing economies; the October statement explicitly sets out that option, specifying that only jurisdictions with few mutual agreement procedures (MAPs) would be able to access it.
Perhaps the most significant open question in the 1 July statement revolved around digital services taxes (DSTs), which have been introduced by many countries. That statement called for the removal of all DSTs and similar measures but did not provide any details as to the timing or the mechanism to accomplish that removal. The new statement provides that a multilateral convention (MLC) will require all parties to remove all DSTs with respect to all companies, and to commit not to introduce such measures in the future. No newly enacted DSTs can be imposed on any company from 8 October 2021 until the earlier of 31 December 2023 or the coming into force of the MLC.
On 21 October, five European countries that have digital services taxes (DSTs)—Austria, France, Italy, Spain and the UK—reached a compromise with the U.S. on how they will phase out the DSTs in light of the recent global agreement on Pillar One. The DSTs will remain in place until Pillar One takes effect and the U.S. has agreed to end certain proposed trade actions and not to impose further trade actions against any of the European countries with respect to their DSTs until the expiration of an interim period.
The new annex explains that Amount A will be implemented through an MLC and, when necessary, through correlative changes to domestic law. The MLC will be supplemented by an Explanatory Statement that describes the purpose and operation of the rules and processes in the convention. The OECD’s Task Force on the Digital Economy will seek to conclude the text of the MLC and its Explanatory Statement by early 2022, with the goal of enabling it to enter into force and effect in 2023 once a critical mass of jurisdictions have ratified it.
Pillar Two will introduce a global minimum tax rate of 15%.
The overall design of Pillar Two did not change from what was originally described in July: two interlocking domestic rules that are together known as the Global anti-Base Erosion (GloBE) rules, and a treaty-based rule, the Subject to Tax Rule (STTR). These rules combine to impose what has been commonly referred to as the global minimum corporate tax, a concept that has garnered considerable attention and been the subject of heated debate.
As originally proposed, the minimum tax rate would have been equal to “at least 15%.” Several countries with corporate tax rates lower than the proposed 15% —Estonia, Hungary and Ireland among them—balked at the language, pointing out that a minimum tax of “at least 15%” could in the future be increased beyond that rate. All three countries have now joined the OECD statement, and the global minimum tax has been set at 15%.
The global minimum tax rules will apply to MNEs that meet the EUR 750 million threshold as determined under the country-by-country reporting rules. The statement provides a carve-out for government entities, international organizations, nonprofits, pension funds and investment funds that are ultimate parent entities of an MNE group, which will not be subject to these rules.
The GloBE rules will provide a carve-out that will exclude an amount of income that is 5% of the carrying value of tangible assets and payroll. In a transition period of 10 years, the amount of income excluded will be 8% of the carrying value of tangible assets and 10% of payroll, declining annually by 0.2 percentage points for the first five years, and by 0.4 percentage points for tangible assets and by 0.8 percentage points for payroll for the last five years.
The GloBE rules will also provide for a de minimis exclusion for those jurisdictions where the MNE has revenues of less than EUR 10 million and profits of less than EUR 1 million.
The annex provides an ambitious schedule for implementation of Pillar Two, with a plan to have model rules to give effect to the GloBE rules and a model treaty provision to give effect to the STTR developed within two months, by the end of November 2021. A multilateral instrument will be developed by mid-2022 to facilitate the implementation of the STTR in relevant bilateral treaties.
The announcement has been greeted with enthusiasm by numerous governments across the globe. It is seen by supporters as an agreement that will restore stability to the international tax system and reset the base on which countries compete with one another from a fiscal standpoint. Many technical details remain to be ironed out in the coming months, and the ambitious timeline for implementation remains.
Companies should begin to scenario plan to determine whether they meet the de minimis thresholds to trigger application of the new rules, the outcomes for the parts of their businesses that are subject to Pillar One and/or Pillar Two and how those outcomes may require changes in their tax strategies. They should also determine whether they need to reevaluate their business and operating models to better align with global tax policies. While existing DSTs remain in force, ensuring continuing compliance with those measures will also be important.
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For perspectives on this global tax agreement across a range of jurisdictions that can be expected to influence how the deal is implemented (and perhaps evolves) in the coming years, see BDO’s comparative report. We will continue to monitor developments and take a further look at implementation—how the proposals are being implemented in practice. Stay tuned for future BDO insights.
On 15 November, BDO will be participating in a seminar, “A New Deal on Corporation Tax,” in which a panel of experts, including Irish Minister for Finance Paschal Donohoe and the OECD’s Pascal Saint Amans, will analyse the agreement and consider opportunities and challenges that may arise for Ireland, and discuss the road ahead for implementation of the deal across the globe. Click here to register for the event.
See more leading Insights from BDO on this topic at 'Taxation of the Digital Economy and pushing fiscal boundaries' and the BDO Global Taxation of the Digital Economy Tool.