The Organisation for Economic Co-operation and Development (the “OECD”) recently announced that a landmark deal has been reached by 136 countries in an attempt to ensure that Multinational Enterprises (“MNEs”) are subject to a 15% global minimum tax rate starting in 2023.
The OECD has spent years advocating and negotiating for global tax reform that targets profit shifting by MNEs. Earlier this year, the OECD was unable to convince some countries to join in, including Ireland which currently boasts a 12.5% corporate tax rate. However, Ireland is now on board as well as Estonia and Hungary. Kenya, Nigeria, Pakistan, and Sri Lanka have not yet agreed to join.
Specifically, countries have agreed to the OECD’s Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. Broadly, this two-pillar solution aims to reallocate taxable income to countries where MNEs earn their income and to generate additional tax revenue through a minimum tax. Under Pillar One, MNEs with global sales of more than EUR 20 billion and profitability above 10% would be subject to the reallocation of profits to “market jurisdictions,” meaning jurisdictions where an MNE has business activities and earns profits regardless of whether the MNE has any physical presence in those market jurisdictions. Pillar Two’s approach is to impose a 15% global minimum corporate tax rate on companies with more than EUR 750 million in revenue. However, there would be some carve outs from the 15% minimum rate with respect to jurisdictions where MNEs have employees or tangible assets. Furthermore, complex calculations addressing income inclusions and denial of deductions would be part of Pillar Two. Accordingly, Pillar Two would involve much more than a simple 15% minimum tax.
The goal is for countries to sign a multilateral convention during 2022 with an effective date of 2023, although most practitioners view this timeline as highly unlikely. The agreement is a deal in principle only and countries will need to legislate the pillars into law. In the European Union, that means one or more directives would need to be implemented and then transposed into the laws of 27 member countries. In the United States, any changes to law would need support from Congress and the White House in the upcoming years.
Although no immediate action is required, international companies and MNEs should review their international structures and operations in order to anticipate taking advantage of opportunities and preparing for any future legislation.