On 1 July 2021 the OECD released a Statement in relation to the work on the tax challenges of the digital economy. The OECD reported that 130 countries and jurisdictions are taking part in the two-pillar reform to the international tax system arising from action 1 of the project on base erosion and profit shifting (BEPS). The countries involved represent more than 90% of global GDP.
The Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy sets out the issues that have been agreed and notes that the remaining parts of the framework and its implementation will be finalised by October 2021.
Pillar One
The provisions of Pillar One aim to ensure a fair allocation of profits and taxing rights between countries in relation to large multinational groups, including digital companies. Under Pillar One the taxing rights for profits above a specified level would be reallocated to market jurisdictions each year.
Multinational enterprises with global turnover above 20 billion euros and profit before tax above 10% of revenue are within the scope of the provisions. The turnover threshold would be reduced at a later date to EUR 10 billion subject to a review of the implementation of the rules and the successful introduction of provisions around tax certainty. The review would take place after seven years.
Companies in financial services and the extractive industries are to be excluded from the Pillar One rules.
The nexus rule would provide for the allocation of “Amount A” to a market jurisdiction if the multinational derives revenue of EUR 1 million or more from the jurisdiction. In the case of jurisdictions with GDP below EUR 40 billion the nexus would be reduced to EUR 250 000.
Between 20% and 30% of the group’s “residual profit” (profit above 10% of revenue) would be allocated to market jurisdictions using a revenue-based allocation key. Detailed source rules would be developed for specific categories of transactions to determine where revenue is source.
The profit or loss of the multinational would be determined on the basis of the financial accounting income, with some adjustments. Losses could be carried forward. Relief from double taxation of profits allocated to market jurisdictions could be given using either the exemption or credit method.
The multinationals would be able to use dispute prevention and mandatory and binding resolution mechanisms to avoid double taxation for “Amount A”, including for transfer pricing and business profits disputes. There will be further consideration of the possibility of an elective binding dispute resolution mechanism in the case of certain developing economies in some circumstances.
Pillar Two
Pillar Two would limit the “race to the bottom” in corporate tax rates by setting a global minimum corporate tax rate that countries could use to protect their tax bases.
The global minimum corporate income tax would be set at a minimum rate of at least 15%. This is expected to raise around USD 150 billion in additional global tax revenues each year. There would be additional tax revenue gains resulting from the increased stability of the international tax system and the resulting tax certainty for both taxpayers and tax administrations.
Next steps
The remaining parts of the approach are to be finalised by October 2021 and effective implementation is planned for 2023.
