International taxation rules may change as early as 2023
In a joint declaration, 130 out of the 139 countries united under the OECD for the purpose of implementing the BEPS initiative have agreed on new rules for the international taxation of multinational corporations. The final wording of the rules, mainly responding to the global economy’s digitalisation requirements, should be approved in October this year, with their effectiveness set as an ambitious goal for 2023. Countries that have showed their support include the world’s largest economies, i.e. the USA, China, Germany, France and Russia.
The new rules are based on a two-pillar approach. Under Pillar One, profits shall be taxed in the country of the products’ or services’ sale (the market country) regardless of whether a group company selling the products or services is physically present in the market country. However, this shall only apply to multinational groups with a global turnover of more than EUR 20 billion and profitability above 10% (measured as profits before tax divided by revenue recognised in the consolidated financial statements). It should therefore apply to the approx. 100 largest multinational groups. The market countries will be entitled to tax the profits if the group’s total sales in a particular country exceed EUR 1 million. The market countries meeting this requirement shall then be able to divide 20–30% of the residual profits, defined as profits above a 10% margin, among themselves. The key for allocating this part of profit among individual countries will be the share of revenues from a particular market in the total revenues of the group.
Pillar One rules will be implemented through a multilateral instrument impacting on double taxation treaties. The instrument should be prepared for signature as early as in 2022, to be in effect from 2023. The instrument should also stipulate the country’s commitment to cancel any already existing unilateral digital services taxes. Financial services subject to regulation and the mining industry shall be excluded from the new rules.
Pillar Two will introduce the global anti-base erosion (GloBE) rules, ultimately having a far greater impact than Pillar One rules, as they apply to multinational groups with a turnover exceeding EUR 750 million. This pillar also contains the income inclusion rule (IIR) under which an additional top-up tax payable will arise in a group’s parent company’s country if the profits of group companies in any one country are taxed at an effective tax rate below a minimum tax rate. Pillar Two also contains the undertaxed payment rule (UTPR) under which it is possible to deny the tax deductibility of expenses where the payment recipient is a company in a jurisdiction with low taxation. The agreed minimum tax shall be 15%.
To illustrate, if the tax calculated as a proportion of the tax rate determined based on legislation of an individual country and accounting profits is lower than 15%, it will be topped up to this agreed amount at the parent company’s level. The GloBE rules should be applied following the procedure agreed at the OECD level. The participating countries’ declaration expects that the rules will already become effective in 2023.
The meeting of G20 finance ministers and central bank governors in October this year will host the potentially last debate on these rules.