During a live webinar on 18 January 2023 the OECD presented the findings of a new analysis of the estimated impact on tax revenue of the implementation of the two-pillar international tax reform. The new analysis carried out by the OECD indicates that the revenue gains from the two-pillar reform of the international tax system will be higher than the previous estimates.
The revenue advantages for market jurisdictions arise from the additional taxing rights to be given to market jurisdictions through the Pillar One provisions and the restriction on tax competition resulting from the global 15% minimum corporate income tax rate.
The design of Pillar One and Pillar Two has changed significantly since the OECD published an Economic Impact Assessment in October 2020 looking at the revenue and investment effects of the international tax proposals.
Pillar One
The new analysis indicates that revenue gains will be higher than previously estimated. Under Pillar One to low, middle- and high income jurisdictions will have higher tax revenue gains. The analysis examined the years 2017 to 2021 and concluded that there would be average global revenue gains of USD 12 billion to USD 25 billion per year on average over that period if the proposals were in effect at that time. On average, taxing rights of around USD 132 billion of profit on average would have been allocated to market jurisdictions under Amount A of Pillar One.
Based on the year 2021 alone, the analysis indicates that taxing rights on about USD 200 billion in profits would have been allocated to market jurisdictions, leading to annual global tax revenue gains between USD 13 billion and USD 36 billion. Low and middle-income jurisdictions would gain more than high income jurisdictions as a share of corporate income tax revenues, but investment hubs would face increased revenue losses.
Pillar Two
The revised estimate for the effect of the international tax proposals under Pillar Two when they have been implemented is that the proposed global minimum tax under Pillar Two would result in annual global revenue gains of around USD 220 billion, which is a significant increase over the previous estimate of USD 150 billion.
Reasons for the increase in revenues
Most of the changes in the revenue estimates are a result of design changes, and the use of more recent and better data. There would be higher levels of profit within the scope of Pillar One and higher amounts of low-taxed profit would be within the scope of Pillar Two. Changes have been made to the approach to the economic modelling resulting in improved estimates.
New design features in the international tax proposals would benefit low tax jurisdictions. The special lower nexus thresholds under Pillar One will help to ensure that smaller jurisdictions are allocated an appropriate amount of profit under Amount A. As smaller market jurisdictions are often low income countries this ensures that more of the additional tax revenue goes to the low income jurisdictions.
The so-called tail-end revenue provisions in the revenue sourcing rules for consumer-facing businesses would also provide additional Amount A revenue for low-income jurisdictions. The de minimis rules, including those relating to the elimination of double taxation, ensure that smaller jurisdictions are less likely to surrender taxing rights.
Under Pillar Two the revised undertaxed payments rule (UTPR) allocation key, which now includes employee numbers, would result in slightly larger revenue for low income jurisdictions. Also the rules on Qualified Domestic Minimum Top-Up Taxes (QDMTTs) would allow affiliate jurisdictions to collect top-up tax in priority to the application of the GloBE Rules in other jurisdictions.
