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Major Victory on OECD Two-Pillar Deal
Tax authorities and the Organisation for Economic Co-operation and Development (OECD) perceive that multinational enterprises (MNE) use tax planning strategies and aggressive transfer pricing to reduce their tax liabilities in high-tax countries by shifting profits to low- or no-tax countries. Since 2013, the OECD has been working diligently for an agreement on a framework to address base erosion and profit shifting (BEPS). After a long period of negotiation, three countries that had been holding out—Estonia, Hungary, and Ireland—have now agreed in theory to the OECD’s plan. With this, nearly 140 countries have finally agreed on a two-pillar tax reform plan, which seeks to implement a global minimum tax as well as address the challenge of taxing the digital economy.
There are two pillars to be addressed in the OECD’s framework. Pillar One focuses on nexus rules regarding local taxation and revising profit allocations. The intent is to allow a portion of the residual, nonroutine profits earned in a jurisdiction to be taxed even if the MNE lacks a physical presence in that country (referred to as Amount A). It also allows for taxation on marketing and distribution activities in local jurisdictions in line with the traditional arm’s-length principal as we move to a more virtual and digital economy (Amount B).
This agreement also requires the countries to terminate any existing digital services taxes, or similar taxes, and agree not to introduce new similar tax regimes. Pillar One is intended to apply to multinational companies with global revenue exceeding €20 billion (approximately $23.3 billion) with profitability of at least €2 billion (approximately $2.33 billion), i.e., 10 percent or more of profits.
Pillar Two—also referred to as the Global Anti-Base Erosion (GloBE) proposal—focuses on implementing a global minimum tax. The rules will require a top-up tax to the extent the tax paid in a country is less than 15 percent. These rules are to apply to MNEs whose annual global revenue exceeds €750 million (approximately $873 million).
This agreement has been long forthcoming and is expected to be implemented during 2023. Execution will be key, and with an agreement on board, it will be important to keep an eye on the expected local country tax law changes throughout 2022 and beyond. For more information, contact your BKD Trusted Advisor™ or submit the Contact Us form below.