Changes in international taxation probably as early as 2023

The G20 has endorsed the framework changes to international taxation agreed at the OECD level (including non-member countries) on 8 October 2021. The changes are spread across two pillars containing rules for shifting taxing rights on profits from existing countries to countries where the sale takes place and introducing a global minimum effective tax of 15%. The new rules will also apply to multinational groups outside the digital sector. Their effective date is planned for 2023.

Pillar 1: Reallocation of profits

Pillar 1 contains new rules for shifting taxing rights to market countries regardless of physical presence. According to available estimates, this could involve a redistribution of USD 125 billion of profits to the market countries. The new rules are based on the following principles:

  • Profit reallocation will apply to corporate groups with a turnover of more than EUR 20 billion and a profitability of more than 10% (measured as the ratio of revenue to profit before tax). Groups operating in the financial and mining sectors will be exempted from the rules.
  • The amount of the group's profits to be taxed in the market countries will be determined as 25% of the portion of the group's profits above the 10% threshold (Amount A).
  • Amount A will be apportioned among the market countries based on the proportion of revenues from sales generated by the group in that country to the group's total revenue.
  • If the group has a company or permanent establishment in the market country that has taxed its profit generated there from distribution and marketing activities (Amount B), this profit will be considered and a simple procedure to determine this profit will be agreed upon. 
  • The rules will also include mechanisms to avoid double taxation (taking into account the tax paid in the market country), resolve disputes in the calculation and allocation of Amount A, and the process of filing tax returns.
  • The new rules will be the subject of a multilateral convention that will amend existing double taxation treaties, probably with effect as early as from 2023. At the same time, the parties will commit not to apply any local digital taxes.

Pillar 2: Global minimum effective tax

Pillar 2 introduces a global minimum effective tax of 15%. The OECD estimates that this measure could generate additional taxable profits of USD 150 billion (i.e., not just involve the reallocation of taxable profits, as is the case under Pillar 1). The new rules are based on the following principles:

  • The global minimum tax will apply to corporate groups with a turnover exceeding EUR 750 million, excluding Certain pension and investment funds and international transport except for air transport.
  • The new rules contain several instruments aimed at achieving a global effective tax rate of at least 15% for the above groups. The most important of these is likely to be a top-up tax that will be compulsorily applied at the parent company if the effective tax rate at the subsidiary does not reach 15%. Other instruments will be the denial of tax deductibility or the imposition of withholding tax in the source country if the corresponding income is not sufficiently taxed in the recipient country.
  • The new rules will be summarised in a binding legislative recommendation and should be effective as early as from 2023. A directive is likely to be prepared at EU level, which member states will then implement in their legislation.

The final version of the new rules, including the legislative framework, should be known for most measures by the end of this year, so that multilateral conventions can be concluded and individual states may adopt relevant legislative acts in 2022.

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