Global Tax Agreement – Latest updates

Major changes are coming to how multinational companies are taxed around the world. In October 2021, over 130 countries agreed on a new framework through the OECD (Organisation for Economic Co-operation and Development).

Here’s a breakdown of the key points:

• More taxes where they sell: Large companies will pay more taxes in countries where they have customers (like selling products or services) and less in countries where they have headquarters and operations.
• Global minimum tax: A minimum tax rate of 15% is being introduced to reduce tax avoidance by companies shifting profits to low-tax countries.

The Two Pillars of Reform:

1. Pillar One: Reallocating Profits (Amount A & B)

   • Applies to large companies with over €20 billion in revenue and a 10% profit margin.
   • A portion of their profits will be taxed in customer countries (25% of profits above 10% margin).
   • This is expected to impact roughly $200 billion in profits globally.
   • Amount B offers a simpler method for calculating taxes on foreign operations.
   • Requires a multilateral agreement (not yet finalized by all countries).

2. Pillar Two: Global Minimum Tax (Three Main Rules + Tax Treaty Rule)

   • Applies to companies with over €750 million in revenue.
   • Aims to ensure a minimum effective tax rate of 15% globally.
   • Implemented through:
     • Domestic minimum tax: Countries can claim the right to tax profits below 15%.
     • Income inclusion rule: Taxes foreign income of a company if below 15% rate in another country.
     • Undertaxed profits rule: Allows a country to tax a company if a related entity in another country has a tax rate below 15%.
   • Uses financial accounting data, impacting business decisions on investment.
   • More flexible – countries can design their own rules based on a template.
   • 45 countries have already adopted or are working on legislation.
   • The US has not yet implemented changes.

Implementation and Challenges:

• EU countries are implementing Pillar Two rules with a 15% minimum tax starting in 2024.
• US inaction creates a complex situation for US companies with multiple minimum tax rules.
• Broad US bipartisan support is needed for Pillar One (Amount A).
• Failure to implement could lead to a return of digital services taxes and retaliatory tariffs.
• These new rules significantly increase complexity for both governments and companies.

Overall, this agreement represents a major shift in international tax policy. It aims to create a fairer system and reduce tax competition between countries.