Historic Milestone To Implement Global Tax Deal

Addressing the tax challenges raised by digitalisation is currently the top priority for the OECD/G20 Inclusive Framework, and has been a key area of focus of the BEPS Project since its inception.

 1. THE ISSUE AND IMPORTANCE.

Recent, rapid and expansive digital transformation has had deep economic and societal impacts resulting in significant changes. This has sparked global debates in many legal and regulatory realms and international tax is no different.

The tax implications are wide-ranging affecting both direct and indirect taxation, broader tax policy issues, and tax administration.

At the Centre of the debate is whether international income tax rules, developed in a "brick-and-mortar" economic environment more than a century ago, remain fit for purpose in the modern global economy.

The fundamental elements of the global tax system which determined where taxes should be paid ("nexus" rules based on physical presence) and what portion of profits should be taxed ("profit allocation" rules based on the arm's length principle), have served their purpose well. Namely, they have enshrined tax certainty and helped to eliminate double taxation stimulating global trade.

Today, however, three important phenomena facilitated by digitalisation – scale without mass, reliance on intangible assets, and the centrality of data – pose serious challenges to elements of the foundations of the global tax system.

On one hand, the emergence of new and often intangible value drivers have revolutionised entire sectors creating new business models while continuously eroding the need for physical proximity to target markets. This continuously challenges the effectiveness of existing profit allocation and nexus rules to distribute taxing rights on income generated from cross-border activities in a way that is acceptable to all countries, small and large, developed and developing (the so-called allocation of taxing right issue).

On the other hand, new technologies have facilitated tax avoidance through the shifting of profits by multinational enterprises (MNEs) to low or no tax jurisdictions. This is the essence of the base erosion and profit shifting (BEPS) project and remains a top priority of the work of the members of the OECD/G20 Inclusive Framework.

The centrality of a predictable, efficient and sustainable international tax system within the ecosystem of economic growth and global welfare cannot be overstated.

Growing discontent among countries has catapulted these issues to paramount importance and the urgency to act has left governments in search of effective responses. The result of nearly a century of multilateral efforts to create a clear, consistent, and coordinated tax system lies in the balance.

Given the nature of these challenges and the difficulty to put borders around the digitalised economy, the approach at this critical juncture is clear: a comprehensive consensus-based solution that deals with both the allocation of taxing rights and the remaining BEPS issues. This would secure and sustain the international income tax system and increase tax equity amongst traditional and digital businesses.

Failure to deliver, however, will ultimately lead to a patchwork of unilateral actions, which in a fragile global economy, would harm investment and economic growth hampering the ability of governments to collect revenues and invest in programmes.

The recent success of the elimination of double non-taxation through the BEPS Project illustrates the strength of a coordinated multilateral approach.

2. ADVANCE TO SOLVE THE PROBLEMS

Members of the OECD/G20 Inclusive Framework on BEPS have been dedicated to finding a comprehensive, consensus-based solution to the two challenges arising from digitalisation, and committed to deliver this solution by 2021.

Specifically, the Inclusive Framework has convened public consultations engaging key stakeholders including governments, businesses, civil society, academia, and the wider public welcoming a broad array of opinions on the matter to help us chart a path forward.

To reinforce sustainability, the Inclusive Framework is also conducting economic analyses and impact assessments to ensure that any solution complements existing conventions securing the integrity of the global tax system.

All members of the Inclusive Framework have dedicated significant resources and attached substantial political imperative to finding a timely resolution of the issues at stake.

3. PILLAR ONE AND TWO

As of October 2021, over 135 countries and jurisdictions have joined the Two-Pillar Solution to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.

3.1. PILLAR ONE – RE-ALLOCATION OF TAXING RIGHTS

Pillar one will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms there have a physical presence there. Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year.

3.2. PILLAR TWO – GLOBAL ANTI-BASE EROSION MECHANISM

Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases. The global minimum corporate income tax under Pillar Two - with a minimum rate of 15% - is estimated to generate around USD 150 billion in additional global tax revenues annually. Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations. See Global Anti-Base Erosion Model Rules published on 20 December 2021, which delineate the scope and set out the operative provisions and definitions of the Globe Rules. These rules are intended to be implemented as part of a common approach and to be brought into domestic legislation as from 2022.

To ensure the new rules can be effectively and efficiently administered, the OECD is providing capacity building support to developing countries on this work. This work will be carried out in partnership with regional organizations and development banks, as well as through extensive technical assistance programmes.

4. HISTORIC MILESTONE TO IMPLEMENT GLOBAL TAX DEAL

On 11/07/2023 138 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) - representing over 90% of global GDP - agreed an Outcome Statement recognizing the significant progress made and allowing countries and jurisdictions to move forward with historic, major reform of the international tax system.

The Two‐Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy will ensure a fairer distribution of profits and taxing rights among countries and jurisdictions with respect to the world’s largest Multinational Enterprises (MNEs).

The Outcome Statement agreed at the 15th Meeting of the Inclusive Framework follows 20 months of intense technical negotiations by delegates to continue the work to implement the Two Pillar Solution. It reflects collaboration and compromise among all jurisdictions - small and large, developing and developed - during negotiations by Inclusive Framework members since October 2021.

The Outcome Statement summarises the package of deliverables developed by the Inclusive Framework to address the remaining elements of the Two‐Pillar Solution:

A text of a Multilateral Convention (MLC) developed by the Inclusive Framework, which allows jurisdictions to reallocate and exercise a domestic taxing right over a portion of MNE residual profits (Amount A of Pillar One). The Inclusive Framework will publish the text of the MLC once it has been prepared for signature, upon resolution of a small number of specific items, as a few jurisdictions have expressed concerns with some specific items in the MLC;

·A proposed framework for the simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities (Amount B of Pillar One); where input from stakeholders is requested on certain aspects prior to finalisation;

 ·The Subject-to-Tax Rule (STTR) together with its implementation framework, which will enable developing countries to update bilateral tax treaties to “tax back” income on certain intra-group income where such income is subject to low or nominal taxation in the other jurisdiction;

·A comprehensive action plan will be prepared by the OECD to support the swift and co-ordinated implementation of the Two-Pillar Solution, coordinating with regional and international organisations.

In a significant development since October 2021, 138 countries and jurisdictions have also agreed in the Outcome Statement to refrain from imposing newly enacted digital services taxes or relevant similar measures on any company before 31 December 2024, or the entry into force of the MLC if earlier, provided the signature of the MLC has made sufficient progress by the end of the year.

This commitment is made in recognition of the progress made to date and the need to prevent disruption or delay of the ratification of the MLC.

5. NEXT STEPS TOWARDS COMPLETION OF THE TWO-PILLAR SOLUTION

The newly agreed Outcome Statement will be delivered to G20 Finance Ministers and Central Bank Governors at their meeting in Gandhinagar, India on 17-18 July.

 In parallel, technical work will continue so that the MLC can be opened for signature in the second half of 2023, with a signing ceremony organised by year-end. The MLC should enter into force during 2025, allowing for the domestic consultation, legislative, and administrative processes applicable in each jurisdiction.

Further work on Amount B of Pillar One - to be launched next week with a public consultation, through 1 September - is slated for completion by year-end. The Inclusive Framework plans to approve a final report on Amount B and incorporate key content into the OECD Transfer Pricing Guidelines by January 2024. Due consideration will be given to the needs of low-capacity jurisdictions and the interdependence with the MLC.

The agreed documentation relating to the STTR will be published next week, with the Multilateral Instrument implementing the STTR to be released and open for signature from 2 October 2023.

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