The OECD’s proposals to reform the international tax system under Pillar 1 and Pillar 2, taking in the progress made by the G7, G20 and the OECD’s 139 country strong Inclusive Framework.
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) recently endorsed the key components of the two-pillar approach to International Tax Law. The agreement has set an ambitious and challenging timeline for both Pillars and whatever the final rules, most global businesses of any scale are likely to be impacted.
Pillar One: Nexus and profit allocation rules
Pillar One focus on the largest multinational groups focusing initially on those with at least EUR 20 billion of consolidated revenue and net profits of over 10% (i.e., profits before tax to revenue) and will require them to pay tax in the locations where their customers and users are located. A formulaic approach will be used to allocate a percentage of profits between each jurisdiction. Pillar One should effectively require in scope multinationals to pay at least some tax in the markets they interact with.
What businesses should know:
Pillar Two: Global minimum tax
Pillar Two, the key components of which are commonly referred to as the “global minimum tax” or “GloBE”, introduces a minimum effective tax rate of minimum 15%, calculated based on a specific rule -set. Groups with an effective tax rate below the minimum in any particular jurisdiction would be required to pay top-up tax in their head office location or in the location of other affiliates. The tax would be applied to groups with revenue of at least EUR 750 million, making it far more widely applicable than Pillar One.
According to the initial timeline released by the OECD, these rules would become effective in 2023, with the exception of the UTPR which would become effective in 2024. While EU Member States are working to reach agreement on the rules. Some countries, e.g., the UK and South Korea, have drafted domestic legislation, while others have initiated public consultations. Many countries have stated the need to push back the effective dates to 2024 and 2025, respectively. Given the enormity of the task ahead this is expected and welcome. However, many multinationals already are subject to Pillar Two, since the transition rules capture certain transactions occurring on or after November 30, 2021.
A number of uncertainties remain, but Pillar Two is likely to be a radical shift in the tax landscape.