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OECD reaches historic accord on global tax reform

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Tax Hot Topics newsletter 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.

Contact:
David Sites
Partner
Washington National Tax Office
T +1 202 861 4104

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