130 countries join new framework for international tax reform

The countries and jurisdictions, representing more than 90 per cent of global GDP, have agreed a new two-pillar plan to ensure that large multinational enterprises (MNEs) pay tax where they operate and earn profits, while adding much-needed certainty and stability to the international tax system.

According to the OECD, the framework updates key elements of the century-old international tax system, which is no longer fit for purpose in a globalised and digitalised 21st century economy. 

Under the first pillar, a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies, is ensured. It foresees re-allocating some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.

As part of pillar one, taxing rights on more than US$100 billion of profit are expected to be reallocated to market jurisdictions each year.

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 at least 15 per cent – is estimated to generate around US$150 billion in additional global tax revenues annually

The OECD expects the two-pillar package to provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-COVID recovery. 

“After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere,” OECD secretary-general Mathias Cormann said.

“This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions. It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year.”