Multinational Enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023, thanks to a major reform of the international tax system finalised on October 8, 2021, at the OECD.
The historic agreement, signed by 136 countries and jurisdictions representing over 90% of global GDP, will also reallocate more than USD 125 billion in profits from around 100 of the world's largest and most profitable MNEs to countries around the world, ensuring that these companies pay a fair share of tax wherever they operate and generate profits.
After years of intense negotiations to bring the international tax system into the twenty-first century, 136 jurisdictions (out of the 140 members of the OECD/G20 Inclusive Framework on BEPS) signed the Statement on the Two-Pillar Solution to Address the Tax Challenges Arise from the Digitalisation of the Economy. It updates and completes the Inclusive Framework's July political commitment to significantly modify international tax standards.
With the addition of Estonia, Hungary, and Ireland, the accord now has the support of all OECD and G20 countries. Kenya, Nigeria, Pakistan, and Sri Lanka are the only four countries that have yet to sign the pact.
The two-pillar approach will be presented at the G20 Finance Ministers meeting on October 13 in Washington, D.C., and at the G20 Leaders Summit in Rome at the end of the month.
The global minimum tax agreement does not intend to eliminate tax competition; rather, it establishes multilaterally agreed limits on it, with countries collecting roughly USD 150 billion in new revenue each year. With respect to the largest and most successful multinational firms, Pillar One will ensure a fairer division of profits and taxing rights among countries. It will reallocate some taxing powers over MNEs from their home nations to markets where they conduct business and earn profits, regardless of whether the companies have a physical presence there. The new laws will apply to multinational firms with global sales of more than EUR 20 billion and profits of more than 10%, which can be called winners of globalisation, with 25% of profits above the 10% threshold to be redistributed to market jurisdictions.
Pillar One is estimated to reallocate taxing rights on more than USD 125 billion in profit to market jurisdictions each year. As a percentage of existing sales, revenue gains in developing countries are predicted to be higher than in advanced nations.
Pillar Two establishes a 15 percent global minimum corporate tax rate. Companies with revenues over EUR 750 million will be subject to the new minimum tax rate, which is expected to raise an additional USD 150 billion in worldwide tax collections each year. The stabilisation of the international tax system, as well as enhanced tax certainty for taxpayers and tax administrations, will provide additional benefits.
"Today's agreement will improve the effectiveness and consistency of our international tax arrangements," stated OECD Secretary-General Mathias Cormann. "This is a big achievement for multilateralism that is both effective and balanced." It is a comprehensive agreement that assures our international tax system is fit for its purpose in an increasingly digitalised and globalised world. "We must now work quickly and diligently to ensure that this fundamental reform is implemented effectively," Secretary-General Cormann said.
Countries hope to sign a global treaty in 2022, with implementation beginning in 2023. The convention is already in the works and will serve as the vehicle for applying the newly agreed-upon taxing right under Pillar One, as well as a standstill and removal provisions for all existing Digital Service Taxes and other comparable unilateral actions. This will provide more certainty and aid in the reduction of trade tensions. In 2022, the OECD will publish model guidelines for implementing Pillar Two in domestic legislation, which will take effect in 2023.
Developing countries have played an active role in the talks as equal members of the Inclusive Framework, and the Two-Pillar Solution includes a number of measures to ensure that low-capacity nations' concerns are addressed. The OECD will guarantee that the regulations are implemented properly and efficiently, as well as provide comprehensive capacity-building assistance to countries that require it.
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