OECD/G20 Inclusive Framework strikes ‘global tax deal’ for digital age

136 jurisdictions out of the 140 members of the OECD/G20 Inclusive Framework on BEPS joined a landmark tax deal and signed the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy on 8 October.

Pillar One is intended to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises (MNEs). It will re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.

Specifically, multinational enterprises with global sales above €20 billion and profitability above 10% will be covered by the new rules, with 25% of profit above the 10% threshold to be reallocated to market jurisdictions. The OECD said taxing rights on more than USD125 billion of profit are expected to be reallocated to market jurisdictions each year, with developing country revenue gains expected to be greater as a proportion of existing revenues than those in more advanced economies.

Pillar Two is intended to introduce a global minimum corporate tax rate set at 15%. The new minimum tax rate will apply to companies with revenue above €750 million and is estimated to generate around USD150 billion in additional global tax revenues annually. The OECD said further benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.

With Estonia, Hungary and Ireland having joined the agreement, it is now supported by all OECD and G20 countries. Only four Inclusive Framework members – Kenya, Nigeria, Pakistan and Sri Lanka – have not yet joined.

“Today’s agreement will make our international tax arrangements fairer and work better,” said OECD Secretary-General Mathias Cormann. “This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform.”

At the end of their October 30–31 summit in Rome, the leaders of the G20 adopted a declaration supporting the implementation of new international tax rules and urging the OECD “to swiftly develop the model rules and multilateral instruments” necessary to bring the agreement into effect globally in 2023.

In endorsing the OECD deal, the G20 did ‘note’ the OECD’s work on helping to address the tax needs of developing countries and to identify “possible areas where domestic resource mobilisation efforts could be further supported”.

Countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023. The convention is already under development and will be the vehicle for implementation of the newly agreed taxing right under Pillar One, as well as for the standstill and removal provisions in relation to all existing Digital Service Taxes and other similar relevant unilateral measures. This will bring more certainty and help ease trade tensions. The OECD will develop model rules for bringing Pillar Two into domestic legislation during 2022, to be effective in 2023.