The OECD’s Two-Pillar Solution Poses Big Tax Changes for International Businesses. Will You Be Affected?

At a glance

• The main takeaway: The Organisation for Economic Cooperation and Development’s (OECD) Two-Pillar Solution is intended to address tax challenges presented by increased digitalization in the global marketplace.
• Impact on your business: Many multinational businesses will be affected by the Pillar Two Model Rules, specifically the Global Anti-Base Erosion (GLoBE) rules, which impose a minimum 15% corporate tax rate on income arising in jurisdictions where they operate.
• Next steps: While Pillar Two is intended to result in a global minimum tax beginning in 2023, multinational businesses should proactively prepare to make sure they understand its impact and are ready to comply.

Schedule a consultation with our International Tax team today and start the conversation.

The full story:

Multinational businesses, prepare for big tax changes on the horizon over the next two years.

Last fall, the OECD announced that qualifying businesses with a foreign presence will be subject to a 15% minimum tax rate in 2023 by translation of the Pillar Two Model Rules into country domestic law. Out of the 140 members of the OECD/G20 Inclusive Framework (the Framework) focused on base erosion and profit shifting, 136 countries and jurisdictions agreed to the solution.

How exactly will your business be affected? We break down the basic details you should know below.

Rationale for Pillar Two Model Rules

The OECD has sought to develop new international tax rules for quite some time, and the Pillar Two Model Rules are part of the most recent agreement following months of negotiation.  The perceived need to develop the new rules has sprung from rapid market globalization, resulting in taxpayers having corporate profits located in multiple jurisdictions of operation — in some cases, those jurisdictions are low-tax. Proponents have argued that the Pillar Two Model Rules should allow countries to protect their tax base and stop the corporate income tax rate “race-to-the-bottom” to attract local infrastructure and employment investment.

What the Pillar Two Model Rules entail

The Pillar Two Model Rules set out a mechanism for the Global Anti-Base Erosion (GLoBE) minimum taxation. Aspects of GLoBE under Pillar Two include:

• The 15% minimum corporate tax will apply to all multinational businesses that have more than €750 million in consolidated revenues.
• Taxpayers in scope calculate their effective tax rate for each jurisdiction where they operate and pay top-up tax for the difference between their effective tax rate per jurisdiction and the 15% minimum rate.
• The top-up tax is generally charged in the jurisdiction of the ultimate parent of the multinational corporation.
• A de minimis exclusion applies where there is a relatively small amount of revenue and income in a jurisdiction.
• Contemplation that jurisdictions introduce their own domestic minimum top-up tax based on GLoBE mechanics, which is fully creditable against a GLoBE liability, preserving the jurisdiction’s primary taxing right.
• Estimated to generate around $150 billion in additional global tax revenues annually.

What’s next?

The OECD will release commentary relating to the model rules and address possible co-existence with the U.S. global intangible low-taxed income (GILTI) rules. By mid-year, the OECD intends to introduce a final framework that will facilitate actual implementation into country local law for effect in 2023.

The bottom line

Though many political conversations and technical details hang in the balance, there is no question that the Two-Pillar Solution will fundamentally change the international tax system. Specifically, the Pillar Two Model Rules, as they stand today, affect a broad population of multinational businesses, so it’s important to understand their potential impact on your business.

Aprio’s International Tax team is here to help you navigate these impending tax changes, understand how they may affect your business and ultimately help you adjust to implement the changes as needed. Schedule a consultation with our team if you’re interested in starting the conversation.

Related resources

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