On October 8th, 2021, Economic Cooperation and Development (OECD) confirmed its approval of the global minimum corporate tax. As a result of the framework, critical reforms to the century-old international tax system will be implemented, allowing it to become more relevant in today’s globalized and digitalized economy.
The countries have agreed to the global minimum corporate tax agreement, which is intended to discourage multinational corporations from storing earnings in low-tax jurisdictions.
Global minimum corporate tax, a two-pillar strategy, and its impact
The implementation of a new two-pillar strategy will change the international tax rules to ensure multinational companies pay their fair share of taxes wherever they operate.
Pillar One Strategy: The biggest MNEs, including internet businesses, are taxed fairly across nations. It would re-allocate taxation powers over MNEs from home nations to markets where they operate and generate profit, independent of physical presence.
Pillar Two Strategy: Aims to level the playing field in corporate income tax competitiveness by establishing a worldwide minimum corporation tax rate that nations may employ to defend their tax bases.
The impact generated by implementing the strategies are:
- Each year, Pillar One is anticipated a total of more than $125 billion in profit will be transferred from low-tax nations where it is now recorded to the countries where it will be generated.
- Based on Pillar two strategy, a minimum rate of at least 15% is projected to generate an extra $150 billion in global tax collections per year.
How global corporate tax works?
The two-pillar strategy will only apply to foreign earnings earned by multinational corporations with global sales of 750 million euros.
Also, the reform would enable the nations where the revenues were generated to tax 25 percent of the excess profit of the biggest multinational corporations, which is defined as profit in excess of 10 percent of revenue for the year in question.
Apart from above, a new worldwide corporation tax would allow the government to choose whatever tax rate they want. However, if a company pays lower rates in a country, the government may raise taxes to at least 15%, negating the advantage of shifting profits.
- In October 2021, the two-pillar approach will be first presented to the G20 Finance Ministers and then to the G20 Leaders in Rome.
- In 2022, the Organization for Economic Cooperation and Development (OECD) will create model regulations for incorporating Pillar Two into domestic law.
- In 2023, effective implementation of global minimum corporate tax.
Current status of global tax deal
- 136 countries and jurisdictions representing more than 90% of global GDP backed the tax accord.
- Kenya, Nigeria, Pakistan, and Sri Lanka have yet to sign.
- About 100 of the world’s biggest and profitable MNEs backed the changes.
What do developing nations gain from this arrangement?
As a result of the Two-Pillar Solution, taxation rights are redistributed to market jurisdictions depending on the location of sales and consumers — typically in developing nations. With the global minimum tax, tax havens can be eliminated, and developing nation governments may avoid providing unnecessary tax incentives and tax vacations.
Countries are also expected to benefit from a subject to tax rule (STTR) that allows them to keep their right to tax payments made to related parties abroad such as interest or royalty payments
In an interview Hitesh Gajaria, Senior Partner on Tax at KPMG India said “There will be a significant increase in investment flows to India if these rules provide certainty in the tax world and litigation falls, as some companies are still sitting on the sidelines due to concerns about litigation in India and elsewhere. However, if this agreement sets the tone for how taxes will be collected in a fair and efficient manner, India, as one of the most promising markets, will see an increase in investment flows of a multiple that we haven’t seen yet.”