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The OECD/G20 Agreement: International Tax entering a new Era

Paris - October 18, 2021

At the OECD on October 8th 2021, 136 countries representing around 90% of the global GDP agreed upon a major International Tax reform based on two main measures (Pillars) that will ensure that Multi-National Enterprises (MNEs) are

  1. taxed on their higher marginal profits in the market jurisdictions where they have generated sales without a physical presence (Pillar One)
  2. subject to a minimum 15% Corporate Tax rate as of 2023 (Pillar Two).

Most of the world countries have agreed to the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy[1] elaborated by the OECD-led Inclusive Framework on BEPS[2].

The implementation of Pillar One will make sure that the countries where the MNEs generate profits have the right to tax them according to their national legislation, irrespectively of whether the firm has a permanent establishment (PE) there.

The MNEs that generate global sales for at least 20 billion EUR yearly and have a profitability above 10% are covered by the new rules.

Specifically, MNEs will have the 25% of their profits in excess of 10% their global turnover [3] be re-allocated to countries where they have generated their sales without having a physical presence.

Around 125 billion USD of profits are expected to be reallocated for taxation to market jurisdictions each year by the implementation of Pillar One.

The implementation of Pillar Two will ensure that MNEs profits are taxed at a minimum Corporate Tax rate of 15%.

This minimum rate will apply to firms with an annual revenue above 750 million EUR.

The new worldwide minimum Corporate Tax rate is expected to generate around USD 150 billion in additional global tax revenues.

A Multi-lateral Convention will be signed in 2022 in order to implement the new International Tax framework set out under Pillar One by 2023.

In particular, this Multi-lateral Convention will (i) set out the rules for determining the re-allocation of profits and taxing rights among the MNEs market jurisdictions in accordance with Pillar One, and (ii) contain provisions that eliminate any existing Digital Service Taxes unilaterally laid down by the signatory countries (see our article on the French Digital Tax).

As to Pillar Two, the OECD is developing model rules for signatory countries to implement the 15% minimum Corporate Tax rate into their domestic legislation during 2022 in order for the rate to be effective by 2023.

Andrea Catasti

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[1] See our article How is the Digital Tax being dealt with at international level? describing in detail how Two-Pillar Solution looked on February 2020. The Two-Pillar Solution agreed upon on October 8th 2021has been updated. See the clickable link towards the definitive Statement for more details.

[2] The Inclusive Framework on BEPS is a OECD-led group of countries that has been working on the implementation of 15 measures to tackle Base Erosion and Profit Shifting by multi-national enterprises on order to improve fairness, consistency and transparency in International Tax.

[3] See the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy for more details.