On 8 October 2021 a total of 136 member countries of the OECD/G20 Inclusive Framework on BEPS joined the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.
The Statement finalised the agreement concluded in July 2020 to reform the international tax rules. All members of the Inclusive Framework participated in the agreement apart from Kenya, Nigeria, Pakistan and Sri Lanka. The agreement on the two-pillar solution will be presented at the meeting of G20 Finance Ministers on 13 October 2021 and to the G20 Leaders’ Summit at the end of October 2021.
Pillar One
Pillar One is intended to achieve a fairer distribution of profits and taxing rights among countries in relation to the largest multinational enterprises. Some taxing rights over multinational enterprises (MNEs) will be re-allocated from their home countries to the market jurisdictions where they have business operations and earn profits, even if they do not have a physical presence there.
Pillar One would apply to MNEs whose global turnover is more than EUR 20 billion and with profitability above 10% (measured as profit before tax divided by revenue). The agreement provides that 25% of the profit above the 10% threshold is to be allocated to the market jurisdictions.
The turnover threshold is later to be reduced to EUR 10 billion, provided there is successful implementation of the provisions, with the relevant review planned to begin seven years after the agreement comes into force. Extractives and regulated financial services are excluded from the Pillar One provisions.
The nexus rule will permit the allocation of an amount (Amount A) to a market jurisdiction if an MNE obtains at least EUR 1 million in revenue from the market jurisdiction. For countries whose GDP is lower than EUR 40 billion the nexus is to be set at EUR 250 000.
Dispute prevention and resolution mechanisms are to be put in place to avoid double taxation for Amount A, including all related issues such as disputes on transfer pricing and business profits. The disputes will be resolved in a mandatory and binding manner.
The OECD estimates that taxing rights on more than USD 125 billion of profits will be reallocated to market jurisdictions each year under Pillar One.
Pillar Two
Pillar Two introduces a global minimum corporate tax at a rate of 15%. The minimum tax is to be applicable to multinational enterprises with revenue above EUR 750 million. An Income Inclusion Rule (IIR) will operate to impose a top-up tax on the parent entity in relation to the low taxed income of a constituent entity of the multinational enterprise. An Undertaxed Payment Rule (UTPR) will deny a tax deduction or require an equivalent adjustment where the low tax income of a constituent entity is not subject to tax under the IIR.
A treaty-based Subject to Tax Rule (STTR) would permit source jurisdictions to impose some source taxation on certain related party payments that are subject to tax below a minimum rate.
The minimum tax is projected to generate around USD 150 billion in additional global tax revenues annually.
Next Steps
A multilateral convention to give effect to the agreed reforms is to be signed by countries during 2022, with effective implementation in 2023. The convention will allow implementation of the new taxing right under Pillar One and will include provisions for the suspension and removal of existing unilateral Digital Service Taxes and similar unilateral measures. Model rules to bring Pillar Two into domestic legislation will be developed during 2022, to be effective in 2023.
