International tax reorganization will now need to contend with a global minimum tax rate.
Globalization and digitalization have facilitated legal tax avoidance by allowing multi-national enterprises (MNE) to shift profits to low or no tax jurisdictions. This has impacted domestic tax revenues for G20 and OECD member countries. In response, the G20 and OECD member countries jointly developed 15 pillars in 2016 to combat base erosion and profit shifting (BEPS) to ensure MNE are paying a ‘fair’ share of taxes wherever they do business.
The OECD has convinced 136 countries that comprises more than 90% of global GDP, including the UK to move forward on the joint statement signed earlier this summer to establish a global minimum tax of 15%. This addresses the second of 15 pillars in the BEPS project. The agreement will apply to MNE with revenue above EUR 750 million. The measures also aim to stabilize the international tax system and increase certainty for taxpayers and administrators.
Traditionally, entities are taxed on their profits by the countries in which they reside and/or where they have a permanent establishment. MNE used this rule to establish themselves in low or no tax jurisdictions and were careful to minimize any permanent establishments in higher tax jurisdictions. This became strategically beneficial for digital companies that do not require a physical presence. Such companies would earn revenues from markets in high tax jurisdictions and were taxable in low to no tax jurisdictions. The BEPS project, including the global minimum tax, aims to ensure a minimum amount of tax is paid on profits by such MNE irrespective of where it resides or has a permanent establishment. Once legislated within each member country, digital MNE will have to re-evaluate their corporate organizational structures and tax strategies.
OECD ‘ International community strikes a ground-breaking tax deal for the digital age’ 8 October 2021 Press Release
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