Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy: 15% Minimum Tax for Multinationals
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On November 4, 2021, 137 countries, under the aegis of the OECD, adhered to the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. Pillar 1 aims to ensure a better distribution of taxation of multinationals according to the countries in which they operate, and Pillar 2 aims to control tax competition on corporate profits by introducing a global minimum tax of 15% from 2023.
At the end of December 2021, the OECD published the model rules on Pillar 2 and the European Commission, in line with the international agreement promoted by the OECD, a proposal for a directive on the establishment of a minimum effective tax rate for the global activities of large multinational groups.
You will find below the important elements of these two documents.
Regarding the Model Rules published by the OECD
On December 20, 2021, the OECD published detailed rules to assist in the implementation of a landmark reform to the international tax system, which will ensure Multinational Enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023.
The rules define the scope and set out the mechanism for the so-called Global Anti-Base Erosion (GloBE) rules under Pillar Two, which will introduce a global minimum corporate tax rate set at 15%. The minimum tax will apply to MNEs with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually.
Thus, these rules allow to:
- define the MNEs within the scope of the minimum tax;
- set out a mechanism for calculating an MNE’s effective tax rate on a jurisdictional basis, and for determining the amount of top-up tax payable under the rules; and
- impose the top-up tax on a member of the MNE group in accordance with an agreed rule order.
The Pillar Two model rules also address the treatment of acquisitions and disposals of group members and include specific rules to deal with particular holding structures and tax neutrality regimes. Finally, the rules address administrative aspects, including information filing requirements, and provide for transitional rules for MNEs that become subject to the global minimum tax.
In early 2022, the OECD will release the Commentary relating to the Model Rules and address co-existence with the US Global Intangible Low-Taxed Income (GILTI) rules. This will be followed by the development of an implementation framework focused on administrative, compliance and co-ordination issues relating to Pillar Two.
For the full text of the model rules, a general summary, frequently asked questions and fact sheets on the application of the rules, click here.
Regarding the European Commission's proposal for a directive
On December 22, 2021, the European Commission published a proposal for a directive on the introduction of a minimum effective tax rate for the global activities of large multinational groups. It has also made available a Q&A on minimum corporate taxation.
This proposal follows closely the international agreement promoted by the OECD and sets out the practical application of the 15% effective tax rate principles within the EU. It includes a common set of rules on the method of calculating the effective tax rate so that it is applied in an appropriate and consistent manner throughout the EU.
The Commission’s proposal closely follows the international agreement with the necessary adjustments to ensure compliance with EU law and without any gold plating. The Directive will therefore adjust the scope to also include purely domestic groups, while the scope of the OECD Pillar 2 is limited to MNEs groups and a parent entity subjects only its foreign subsidiaries to the income inclusion rule. This departure from the OECD Model Rules is necessary in order to comply with the EU fundamental freedoms, specifically the freedom of establishment.
The OECD Model Rules allow jurisdictions the option to apply a qualifying domestic minimum tax. The Commission’s proposal will also allow EU Member States to exercise the option to apply a domestic top-up tax to low taxed domestic subsidiaries. This option will allow the top-up tax due by the subsidiaries of the multinational group to be charged locally, within the respective Member State, and not at the level of the parent entity.
The Commission's tax program is therefore complementary to the OECD agreement, but is not limited to the elements covered by that agreement. By the end of 2023, the Commission is also expected to publish a new framework on company taxation in the EU, which will reduce the administrative burden on companies operating in several member states, remove tax obstacles and create a more business-friendly environment in the single market.
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