International Corporate Tax Reform: The Latest Update
The Organization for Economic Cooperation and Development (OECD) announced on Oct. 8 that 136 countries have joined a new two-pillar plan aimed at reforming the international taxation rules. The OECD hopes that this new framework will ensure that multinational enterprises pay a fair share of tax where they operate, instead of where they are located.
The framework will update key elements of an antiquated international tax system, which no longer fits in a globalized and digitalized 21st century. In return, no new digital services taxes (DSTs) can be imposed.
The new framework is built on two fundamental pillars.
The rules under pillar one will only apply to multinational enterprises (MNEs) with a global turnover of at least 20 billion euros ($23 billion) and profitability of more than 10%.
Where an in-scope MNE derives at least 1 million euros in revenue in a given jurisdiction, an amount (Amount A) will be reallocated to the territories where it does business. For smaller countries with a GDP lower than 40 billion euros, the threshold will be 250,000 euros.
The trade-off is that existing DSTs will need to be removed and any newly enacted DSTs cannot be imposed on any company from Oct. 8, 2021, until of Dec. 31, 2023 at the earliest, or when a multilateral convention (MLC) abolishing DSTs comes into force.
A global minimum tax rate has been set at 15%. These global minimum tax rules will apply to MNEs that meet the 750-million-euro threshold as determined under the country-by-country reporting rules.
This does not include government entities, international organizations, non-profits, pension funds and investment funds that are ultimate parent entities of an MNE group.
Crowe’s Corporate Tax Partner Laurance Field explains the new corporate tax reform in more detail and what critical challenges can be expected in the coming years.