The Organisation for Economic Co-operation and Development (OECD) announced a sweeping agreement on Oct. 8, 2021, on the two-pillar approach for overhauling international tax rules on a global basis.
The agreement was set out in a statement
that adds more details to the preliminary agreement reached on July 1, 2021, including a detailed implementation plan that contains deadlines for the work needed to implement the two-pillar solution. The statement also includes answers to 12 frequently asked questions and a highlights brochure of the two-pillar solution.
The statement was joined by 136 of the 140 members of the OECD’s and G20’s Base Erosion and Profit Shifting (BEPS) project, including all members of the European Union. Ireland, Hungary and Estonia had been the last European holdouts. The 136 agreeing jurisdictions represent more than 90% of global GDP, and the remaining holdout jurisdictions are Kenya, Nigeria, Pakistan and Sri Lanka. The two-pillar solution is also now agreed by all G20 countries and was endorsed by G20 Finance Ministers and Central Bank Governors during their fourth official meeting in Washington D.C. on Oct. 13, 2021.
Under the new agreement, Pillar One would apply only to about 100 of the biggest and most profitable multinational enterprises (MNEs) that have global turnover of over 20 billion euros and profitability above 10%. These companies would face a reallocation of 25% of their residual profits to “market” jurisdictions. Exclusions for “extractives” and “regulated financial services” were retained from the July statement. The reallocated profit amount is expected to be approximately $125 billion annually.
Under the agreement, Pillar Two would require jurisdictions to impose a 15% global minimum corporate tax to a much larger group of MNEs—those with annual revenue over 750 million euros. Pillar Two is expected to generate approximately $150 billion in new annual revenues.
The OECD/G20 Inclusive Framework on BEPS expects to develop model rules under Pillar Two in 2021, and a multi-lateral convention (MLC) under Pillar One in 2022, to bring the two-pillar solution into effect by 2023. The two pillars will need to be implemented in different ways. Countries can merely amend their own tax codes with corporate rate and minimum tax changes to meet the requirements of Pillar Two. Pillar One would need to be implemented through an MLC, which could require treaty ratification in some countries. Sen. Pat Toomey, R-Penn., recently wrote to Treasury Secretary Janet Yellen arguing that Pillar One could not be implemented without formal Senate treaty approval by a 67-vote super-majority.
The adoption of Pillar One would also require all parties to remove digital services taxes (DSTs). The U.S. has been in negotiations with several member jurisdictions over the withdrawal of existing DSTs under the two-pillar solutions. Following the OECD’s announcement, Treasury Secretary Yellen released a statement welcoming this “once-in-a-generation accomplishment for economic diplomacy,” stating the deal is a victory for American businesses, the international business community, and for the members of Congress who have drafted their own international tax reform proposals.
Washington National Tax Office
+1 202 861 4104
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.