Agreement Reached on The Global Minimum Tax Rate of 15%
The global minimum corporate tax rate of 15% has been agreed upon by 136 nations.
Following years of intensive work and negotiations to bring the international tax rules into the 21st century, members of the OECD/G20 Inclusive Framework on BEPS (the Inclusive Framework) agreed on 8 October to the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.
In the G20 meeting held on Saturday, 30th October 2021 the new global minimum tax was endorsed and G20 Rome Leaders Declaration of 31 October 2021 states that “The final political agreement as set out in the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy and in the Detailed Implementation Plan, released by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on 8 October, is a historic achievement through which we will establish a more stable and fairer international tax system. We call on the OECD/G20 Inclusive Framework on BEPS to swiftly develop the model rules and multilateral instruments as agreed in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023. We note the OECD report on Developing Countries and the OECD/G20 Inclusive Framework on BEPS identifying developing countries’ progress made through their participation in the OECD/G20 Inclusive Framework on BEPS and possible areas where domestic resource mobilisation efforts could be further supported.”
With the new global tax reform, the world’s largest and most profitable enterprises (Multi National Enterprises “MNEs”) will be subject to a minimum 15% tax rate from 2023 onward so that these firms pay tax wherever they operate and generate profits.
It is evident that the MNEs targeted are mostly Internet giants such as Google, Facebook, Amazon and Apple.
According to the OECD’s statement, “Digitalisation and globalisation have had a profound impact on economies and the lives of people around the world, and this impact has only accelerated in the 21st century. These changes have brought with them challenges to the rules for taxing international business income, which have prevailed for more than a hundred years and resulted in MNEs not paying their fair share of tax despite the huge profits many of these businesses have garnered as the world has become increasingly interconnected. The two-pillar solution will fundamentally reform international tax rules.”
Under pillar one, MNEs with global sales above EUR 20 billion and profitability above 10% will be covered by the new rules, with 25% of the profit above the 10% threshold to be reallocated to market jurisdictions where they have business activities and earn profits, regardless of whether firms have a physical presence there. Taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year under Pillar One. Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues.
Under pillar two, a global minimum corporate tax rate is set at 15%. The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually.
A multilateral convention is expected to be signed by the countries involved during 2022 with effective implementation of the reforms in 2023.
There are nevertheless major difficulties remaining toward the push for implementing an overhaul of the international tax system. We shall wait and see how quickly these reforms will take place in practice.
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