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With the declaration of final tax system reformation on 10th August 2021, by 136 countries and jurisdictions representing 90% of global GDP, you may be happy to know that Multinational Enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023 and that this deal would embark on distribution of US D 125 billion from 100 of the world’s largest and most profitable MNEs to countries worldwide.

This should ideally ensure that these huge firms with tentacles everywhere pay a fair share of tax wherever they operate and naturally generate profits. Let us learn the rudiments of this historic development to avenge our intellectual curiosity.

With due references given at the end, let me wade you with details.

  • With Estonia, Hungary and Ireland having joined the agreement, it is now supported by all OECD and G20 countries. Four countries – Kenya, Nigeria, Pakistan, and Sri Lanka – have not yet joined the agreement. It is understandable in view of some of the countries remaining in Grey list, they may need more time to ponder over their actions.
  • It is encouraging to know that the two- pillar solution would have been handed over to the G20 finance ministers meeting in Washington D.C. on 13th October, for further deliberations at G20 Summit in Rome at the end of this month, namely, October 2021.

International Tax Deal For Digital Age, Finally

What is the impact of the above agreement? Will it seek to eliminate tax competition among the nations? Some countries like Ireland offered very attractive tax rebates or low tax rates cornering huge MNE business in the past?

Though no competition will be eliminated, the agreement offers to collect around USD 150 in new revenues annually.(USD – U S Dollars)

Pillar one is expected to result in better and fairer distribution of profits and taxing rights among the countries in relation to the largest and most profitable multinational enterprises (MNE). Yes, shifting of taxing rights over MNEs will be from their home countries to places where they have business activities and earn profits regardless of physical presence or not.

I would like to reproduce certain important advantages from original communication as under.

“Multinational enterprises with global sales above EUR 20 billion and profitability above 10% – that can be considered as the winners of globalization – will be covered by the new rules, with 25% of profit above the 10% threshold to be reallocated to market jurisdictions.”

What is the latest information as regard to pillar two?

1. It introduces a global minimum corporate tax rate set at 15%.

2. It is applicable to companies with revenue above EUR 750 Million and is expected to add additional global revenues of USD 150 Million annually.

3. Stabilized international tax system instead of fighting among the countries will facilitate certainty for taxpayers and tax administrations who want to do justice to their taxpayers.

4. Claiming it as major victory for effective and balanced multilateralism, OECD Secretary-General Mathias Cormann, was of the opinion that it would fit very well with the advanced system of digitalized and globalized world economy which did not show any sign of limiting its approach around the globe.

5. He was of the firm opinion that this major reform would be implemented quickly and effectively over the next couple of years.

Expected multilateral convention during 2022, with effective implementation in 2023, would enable implementation of the newly agreed taxing right under Pillar One, as well as for the standstill and removal provisions in relation to all existing Digital Service Taxes and other similar relevant unilateral measures, as per the projections of tax experts. Based on OECD which is expected to develop model rules for bringing Pillar two into domestic legislation during 2022, to be effective in 2023, the other parts of the world in other jurisdictions will also follow the lead.

Certain frequently asked questions on OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy are answered here to supplement our knowledge. (Extended over 4 pages, the answers have been given in brief with the option of anyone serious to do research or undertake further work to refer the original communication)

1. How will the Two-Pillar Solution make sure that MNEs pay their fair share of tax?

Each pillar is related to a different gap under the existing rules allowing MNEs to avoid paying taxes. Let us look at pillar one where hundred of the biggest and most profitable MNEs would be forced to re-allocate part of their profits to countries where they sell their products, and services but may not even have physical office.

Similarly, under Pillar Two, a much larger group of MNEs (any company with over EUR 750 million of annual revenue) are likely subject to a global minimum corporate tax of 15%.

2. In July 2021, Inclusive Framework members agreed a Statement on how to address these issues. What are the main changes in the Two-Pillar Solution finalized in October?

The Statement adopted in July 2021 was a major achievement with the real picture of 134 countries and jurisdictions agreeing to the new two pillar solution to meet the tax challenges, arising naturally from digitalization. Yes, counter it with the latest news item today, wherein the Apple company proudly proclaiming its doubling of business in India. All of us are aware that apart from producing world class products, they teach the world how not to pay taxes using the normal tax loopholes in the world tax system.

Is it so simple that at least 15% tax will be paid by these multinational enterprises?

No, it is a little long way but the international agreement among 134 countries and jurisdictions attracts a detailed implementation plan to be executed by 2023. By sheer attraction of getting more taxes, countries both rich and poor would come around and start sharing the taxes on an agreed basis.

3. Does this only apply to around 100 companies? What about the other multinational companies: shouldn’t they pay tax, too?

4. To start with the implementation among all companies of various sizes and operation, immediately it may not work out as any one can desire. However, I want to keep our intellectual desires fulfilled with the direct passage from original communication.

5. “There is a provision to expand the scope after 7 years once there is experience with implementation.

Pillar One also includes a commitment to develop simplified, streamlined approaches to the application of transfer pricing rules to certain arrangements, with a particular focus on the needs of low-capacity countries, which are very often the subject of tax disputes.

Pillar Two’s goal is to ensure that a much broader range of MNEs (those with a turnover of at least EUR 750M, which will be hundreds of companies) pay a minimum level of tax, while preserving the ability of all companies to innovate and be competitive.”

6. For others, internationally agreed global income may continue to attract the attention of all countries and enable them to get the required taxes from all taxpayers. One can easily recollect how IRS, USA start attracting the above global concept and made even rich from India with green cards/citizens of USA even lose their passports for non-payment of income tax.

7. What do developing/underdeveloped countries get out of this deal?

With gross receipts of USD 120 billion under Pillar 1 and USD 150 billion under Pillar 2, the arrangements indicate a paradigm shift from the developed to developing countries for sharing of taxes. Many companies sell their products by sheer brand image from developed nations and acquire huge income and if at all required, use transfer pricing rules to avoid payment of even small taxes. The same bureaucrats who invent the laws with loopholes are later used to fight the cases against the same government to give benefits. For once, this nexus between the bureaucrats and rich companies will be curbed, if not eliminated.

8. Will developing countries get support in the implementation phase?

OECD has drawn a detailed capacity building plan to implement the above agreement. I have already explained in one of my earlier articles in tax guru how US President Biden agreed with these proposals already since his country which is one the greatest innovative nations suffer enormously due to tax havens and smaller nations like Ireland to divert world profits of big companies to no man’s lands.

9. The Two-Pillar Solution provides exclusions for things like mining companies, shipping, regulated financial services and pension funds; why shouldn’t those kinds of companies pay their fair share?

The main purpose was to address the tax issues related to big corporations under Pillar 1 and Pillar 2 who have managed to pay nil taxes, if possible. The others mentioned in this question are already paying the required taxes as per their place of functioning and hence this new agreement may not affect them.

I incorporate the following information for anyone interested in serious enquiries. “Further information on the continuing international tax reform negotiations is also available at: https://oe.cd/bepsaction1.

Media enquiries should be directed to Pascal Saint-Amans (+33 6 26 30 49 23), Director of the OECD Centre for Tax Policy and Administration, or to Lawrence Speer (+33 1 4524 7970) in the OECD Media Office (+33 1 4524 9700).”

Conclusion

The aim of this article enhances our knowledge on now international taxation affecting 140 civilized countries of the world which attempt to meet, discuss, and implement altruistic objectives of equal distribution of corporate profits which constitute major portion of taxes being evaded or diverted.

You may buy any internationally reputed products, but huge profits earned by big companies go to no man’s land and you, me, or none gets any benefit.

All types of legal/tax loopholes ensure diversion of profits.

As a citizen of the civilized world, I share the optimism that collective wisdom of the tax world can benefit this universe occupied by us.

The subject of this article is very lengthy,

 and I can not do justice with my words. Please refer the relevant web sites for accurate news.

Reference

OECD WEB SITES

https://www.oecd.org/tax/international-community-strikes-a-ground-breaking-tax-deal-for-the-digital-age.htm

Statement on a two- pillar solution

https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.htm

My earlier article titled “G 7 accepts Biden’s global tax reform” in taxguru.in which clearly spells out the details of Pillar 1 and Pillar 2.

*****

Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting because of the above write up. The possibility of other views on the subject matter cannot be ruled out. By use of the said information, you agree that Author/TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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Qualification: Post Graduate
Company: subramanian natarajan cpa firm
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Member Since: 09 May 2017 | Total Posts: 195
A banker with 27 years of experience, a CPA from USA with specialization in US taxation, individual, partnership, S corporation or LLC taxation etc View Full Profile

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