Keywords: Pillar 2, minimum corporate income tax, multinationals, global, OECD, Pillar 1, 15%
On July 1, 2021, 130 countries agreed to an overhaul of the international tax system and a global minimum tax. The first pillar of the agreement regulates a different distribution of profits and taxing rights between countries for the largest and most profitable multinationals, including large digital companies. This allows countries where a multinational has customers or users (so-called market countries) to levy more profit tax, even if the multinational does not have a physical presence in that country. It is expected that Pillar 1 will result in taxing rights on more than $100 billion in profits being allocated to market countries each year[1].
The second pillar of the agreement includes agreements on a minimum global tax rate of at least an effective 15% profit tax. Under Pillar 2, it is expected that approximately $150 billion in additional tax will be levied globally each year from multinational corporations.
Pillar 1 applies to companies with worldwide turnover in excess of €20 billion and a profit margin (profit divided by turnover) of more than 10%. After seven years, it will be reviewed whether to lower the turnover threshold to €10 billion, which will bring more companies under the scope. There will be an exception for natural resources and regulated financial services. The exact details of these exceptions will follow and be finalized by October 2021.
Market countries that have sufficient nexus with a company (more than €1 million in sales in that country) will be allocated 20% to 30% of residual profits. This is the profit above a margin of 10% of sales. In the coming months, the exact percentage (the profit to be distributed) will still be agreed upon[2].
The Pillar 2 minimum tax rules will in principle apply to multinationals with a turnover of at least €750 million[3]. This means that countries may levy tax on the foreign activities of these companies if these profits are not taxed at an effective rate of at least 15%. Government bodies, international organizations, non-profit organizations, pension funds and investment funds are excluded from the scope of the measures.
The minimum tax is shaped through two main rules, the so-called Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR)[4]. An exception is included to limit the impact of the Pillar 2 measures for real economic activities, a substance carve-out. The agreement is an outline agreement. There will be no further deviations from it, but a significant number of important (technical) aspects must still be worked out in more detail. The ambition is for both pillars to enter into force in 2023.
NAZALI TAX & LEGAL
[1] OECD (2021), OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors – July 2021, OECD, Paris, www.oecd.org/tax/oecd-secretary-general-tax-report-g20-finance-ministers-july-2021.pdf.
[2] Ministerie van Financiën. (2021d, juli). Akkoord in het Inclusive Framework over de herziening van het internationale belastingsysteem.
[3] OECD. (2021, juli 1). Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy. https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf
[4] Russo, A., Michaels, M. J., Rahim, S. R., Kelly, B. B., Odintz, J. D., & Silberztein, C. (2020, 14 oktober). International Tax: Pillar Two - The new normal for effective tax rates. Lexology. https://www.lexology.com/library/detail.aspx?g=6e6fa622-e82e-44e9-86f6-f791cba9022a