OECD Countries Agree to Global Tax Reform that Includes Global Minimum Tax of 15 Percent

The countries of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) have agreed to a two-pillar framework to reform the global tax system. The leaders of 130 countries affirmed their support for both taxing rights for market countries and a global minimum tax rate of at least 15 percent applied on a country-by-country basis. The framework applies to large multinational corporations and addresses the ongoing issue of how to tax technology companies that produce revenue in countries in which they do not have a physical presence. The negotiators expect to finalize the remaining elements of the framework in October for implementation in 2023.

The OECD/G20 Inclusive Framework was initiated in 2016 “to address the tax challenges arising from globalisation and the digitalisation of the economy.” The framework involves 139 countries in negotiations over rules to prevent base erosion and profit shifting, which occurs when corporations shift profits to low-tax countries where they have limited economic activity. Pillar One of the framework addresses the allocation of taxing rights and Pillar Two addresses minimum global taxation.

Pillar One: Allocation of Taxing Rights

Pillar One aims to tax companies where they earn residual profits rather than the current practice of taxing them where they have a physical presence. It gives market countries taxing rights on 20-30 percent of profits exceeding a 10 percent margin for multinational enterprises with global turnover of more than 20 billion euros. This applies regardless of whether a company has a physical presence in the market country. Companies in the extractive and regulated financial services industries are excluded from the requirement.

The rule has a jurisdictional nexus of 1 million euros in revenue, or 250,000 euros for jurisdictions with gross domestic product of less than 40 billion euros, with the relevant profit or loss measured with financial accounting income. The rule includes a safe harbor that caps the residual profits of a company allocated to a market country in situations where the market country already taxes the company’s residual profits. The agreement also allows for exemptions or credits to avoid double taxation.

Pillar Two: Global Minimum Tax

Pillar Two implements a global minimum tax of at least 15 percent on a country-by-country basis to ensure that all large multinational corporations pay a minimum level of tax regardless of where the companies earn the profits. The application of the tax on a “country by country basis” is part of the anti-BEPS effort to prevent companies from allocating profits to low-tax jurisdictions in order to achieve an overall lower tax rate. The country-by-country basis allows the framework to coexist with the U.S. global intangible low-taxed income (GILTI) regime under certain conditions. GILTI, an anti-deferral rule that applies to income earned abroad by certain U.S. shareholders in controlled foreign corporations, operates effectively as a U.S. global minimum tax on foreign earnings.

Under the framework, an “income inclusion rule” allows a corporation’s home country to impose a “top-up” tax on a parent entity for the income of a constituent entity that is taxed below the minimum rate. An “undertaxed payment rule” denies deductions or requires an equivalent adjustment to the extent that the low tax income of a constituent entity is not taxed under the income inclusion rule. These rules apply to companies with revenue of at least 750 million euros as determined under country-by-country reporting. Lastly, the framework includes a treaty-based rule that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate.

Removal of Digital Services Taxes

The Inclusive Framework will also coordinate the “application of the new international tax rules and the removal of all Digital Service Taxes and other relevant similar measures on all companies.” Digital services taxes are taxes on the revenue, rather than the profit, of technology companies that sell online services and collect data from customers. Market countries impose the tax on revenue sourced in their jurisdiction even if a company does not have a physical presence in the country. Repealing digital taxes is a major U.S. goal in global tax negotiations, and the United States has threatened to impose tariffs on several countries with digital taxes.

Global Tax Negotiations

The agreement on the OECD/G20 Inclusive Framework comes shortly after the economic ministers and central bankers of the G7 countries expressed support for a global minimum corporate tax as part of ongoing negotiations to reform the global tax system. A global minimum tax is a priority for the Biden administration, which has proposed to increase the GILTI minimum tax rate from 10.5 percent to 21 percent and apply it on a country-by-country basis rather than on the current aggregate basis.

The countries will finalize the remaining technical aspects of the framework in October 2021. European Union members Hungary, Ireland, and Estonia are among the nine countries that have not joined the framework, and the remaining technical aspects of the agreement could allow for concessions that bring remaining countries into the agreement.

Weaver will monitor these negotiations and report on developments as they arise. For questions on how a global minimum tax might affect your business, contact us. We’re here to help.

Update: The OECD/G20 Inclusive Framework finalized agreement on a two-pillar framework that includes a global minimum tax rate of at least 15 percent. The agreement applies to companies with global sales of more than 20 billion euros and profits exceeding a 10 percent margin. The leaders of 136 countries affirmed their support for the agreement, including former holdouts Estonia, Hungary, and Ireland. The only members of the OECD/G20 Inclusive Framework that have not yet joined the agreement are Kenya, Nigeria, Pakistan, and Sri Lanka.

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