The deal also means a ‘standstill’ on the introduction of new digital services taxes (DSTs), with no new taxes being imposed from 8 October 2021 until the earlier of 31 December 2023 or the coming into force of the multilateral convention implementing the deal. Signatories to the convention will agree to remove existing DSTs and not to introduce such measures in the future.
Over recent years there has been a proliferation of unilateral digital sales taxes (DSTs). These have been imposed on the revenues of social media and other digital companies by countries including the UK and France, which have wanted to get a greater share of the tax revenues from digital companies which they perceive as underpaying tax in their jurisdictions.
“The standstill on new DSTs gives the US a breathing space to try to get the deal through the Senate. It will also be very welcome news for the businesses which are currently having to cope with a plethora of DSTs, each operating slightly differently, although they might want to hold off on popping open the champagne in celebration until the detailed proposals are finalised and legislated locally; there is still a lot of work to be done, notwithstanding the landmark political deal,” Walker said.
The reforms are comprised of two ‘pillars’. Pillar one aims to ensure a perceived fairer distribution of profits and taxing rights among countries with respect to the largest multinationals. Multinational enterprises with global turnover above €20 billion will be subject to tax on a proportion of their profits in the countries where they operate. The €20bn turnover figure will potentially fall to €10bn after seven years. Extractive industries and regulated financial services are excluded.
Countries which will benefit from the new taxing right will be those in which the multinational derives at least €1 million in revenue. For smaller jurisdictions with GDP lower than €40bn, the threshold will be set at €250,000. 25% of the profit in excess of 10% of revenue will be allocated to ‘market jurisdictions’, which will be the countries where goods or services are used or consumed.
Where the residual profits of a multinational are already taxed in a market jurisdiction, a marketing and distribution profits ‘safe harbour’ will cap the residual profits allocated to the market jurisdiction.
The OECD estimates that under pillar one, taxing rights on more than US$125bn of profit are expected to be reallocated to market jurisdictions each year. However, Kenya and Nigeria are reported not to have signed up to the deal because of concerns that they will lose more from the abolition of DSTs than they will gain under the new taxing rights.
Pillar two introduces a global minimum corporate tax rate set at 15%. The new minimum tax rate will apply to companies with revenue above €750m and is estimated by the OECD to generate around US$150bn in additional global tax revenues annually.
The minimum tax rate does not mean that countries have to set their rate of tax above the minimum level. If profits are made in a low tax jurisdiction, the country where the group is based will be able to 'top-up' the tax paid to the minimum rate. This is designed to discourage the so called 'race to the bottom' whereby countries compete for international business by setting a low rate of corporate tax.
In response to pillar two, Ireland has announced that it is increasing its corporation tax rate to 15% for businesses with a turnover of more than €750m. Smaller businesses will still be taxed at the 12.5% rate.
“Although countries with tax rates below 15% do not need to increase them to 15%, doing so at least means that they, rather than another country, will get the additional tax revenue,” Walker said. “Expect more jurisdictions with low rates currently under 15% to increase them.”
Countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023. The convention, which is already under development, will be the vehicle for implementation of the new taxation right under pillar one, as well as for the DST standstill and removal provisions. The OECD said it will develop model rules for bringing pillar two into domestic legislation during 2022, to be effective in 2023.
The two-pillar solution will be delivered to the G20 Finance Ministers on 13 October, then to the G20 Leaders’ Summit in Rome at the end of October.
“The timetable for implementation of the deal is extremely ambitious, bearing in mind that signatories to the deal will have to enact domestic legislation as well and there will be particular political challenges in getting the deal through the US legislative process,” said Walker.
The Swiss Finance Ministry has already said that it will not be possible to introduce the new rules by 2023.
