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What is the Global OECD tax deal?

On 8 October 2021, the Organisation for Economic Cooperation and Development (OECD) announced a major reform of the international tax system.

The deal, brokered by the OECD and supported by 136 countries and jurisdictions, aims to ensure that the world’s largest multinational enterprises pay a fair rate of tax irrespective of where they operate or generate profits.

The deal is the result of exhaustive negotiations by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting and attempts to tackle tax challenges that are arising in an increasingly digitised global economy. It is divided into two pillars.

Pillar one, which involves the re-allocation of taxing rights, addresses the evolving business landscape and the ability of companies to carry out business in jurisdictions without a physical presence.

Pillar two will establish a minimum global corporate tax rate to ensure that profits made by the largest MNEs are subject to a minimum level of tax irrespective of where the company is operating.

Pillar one

Pillar one addresses the taxing rights of more than USD 125 billion made by 100 of the world’s largest and most profitable MNEs. This includes any MNEs with global sales in excess of EUR 20 billion and profitability above 10%.

It will reallocate the taxing rights of this revenue from the home countries of these MNEs to the markets where they conduct business and earn profits.

It is hoped that this will achieve a more even distribution of taxing rights, with revenue gains of developing countries expected to be higher than those of more developed economies.

Pillar two

Pillar two will set a global minimum corporate tax rate of 15%, applicable to all companies with combined financial revenues of more than EUR 750 million. This ruling also allows any jurisdictions where the parent entity has subsidiaries to levy a top up tax if the MNEs home jurisdiction has not collected the top up tax or has an effective tax rate lower than the 15% that has been set.

It is anticipated that the improved transparency and clarity that this ruling will bring will help to stabilise the international tax system and improve international trade relations.

When will the two pillars be implemented?

It was initially hoped that the convention would be effective by 2023 once global agreement could be reached on both pillars. However, in this year’s World Economic Forum in Davos, Switzerland, the Secretary General of the OECD, Mathias Cormann stated that due to difficulties negotiating an agreement the proposal would be delayed until 2024.

Support for the deal

Of the 140 members of the OECD/G20 Inclusive Framework on BEPS, 136 countries, representing more than 90% of global GDP have agreed the deal. However, four countries – Kenya, Nigeria, Pakistan and Sri Lanka have yet to join.

FAQs

Are any companies exempt from Pillar two’s rules?

Yes, government entities, international organisations, non-profit organisations and pension or investment funds that are parent companies of an MNE are all outside of the scope of Pillar two.

Is it mandatory for countries to adopt the global minimum tax rules?

No, the rules are not obligatory. However, any jurisdictions that opt to follow the rules agree to their implementation exactly as laid out by the OECD. Furthermore, should they choose not to implement the rules, they must accept their application by another jurisdiction with respect to MNEs carrying out business within their jurisdiction.

What administrative and compliance costs will be incurred as a result of the global minimum tax rules?

The GloBE rules were conceived with the aim of keeping costs and complexity for tax authorities and taxpayers to a minimum. With this in mind, a number of key elements have been included in the rules, such as:

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• The use of Country-by-Country reporting (CbCR) style thresholds and definitions for ascertaining scope.

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• The acceptance of entity level financial information and the use of parent financial accounting standards, with effectively no book-to-book and limited book-to-tax adjustments.

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• The use of deferred tax accounting to deal with timing differences.

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• A de minimis exclusion for operations in a jurisdiction that is below EUR 1 million in income and EUR 10 million in revenues.

How do the rules mitigate the possibility of overtaxation and ensure a coordinated approach?

The GloBE rules have been designed to be complementary to each other and to allow all jurisdictions that adopt them to do so with a common approach. However, it is clear that it will not be possible for all countries to apply their rules simultaneously on the same item of low-taxed income. To avoid the issue of overtaxation, priority rules will apply to ensure that that the GloBE rules are inapplicable in situations where the low-taxed income is already subject to the minimum tax elsewhere.

The GloBE Implementation framework will also conduct periodic multilateral reviews to ensure that rules are being applied in a coordinated manner and consistently with the rules.

Will the global minimum tax rules apply in addition to others, such as the CFC rules? Won’t it result in double taxation?

No, the GloBE rules are intended as a minimum tax and are therefore complementary to existing tax rules, such as Controlled Foreign Company (CFC) regimes. When calculating the effective tax rate in a jurisdiction, any existing regimes such as CFC are taken into consideration, meaning that as long as tax is paid at or above the minimum rate with existing rules, no additional tax will be levied under Pillar two.

How can Premier Brains help?

The partners at Premier Brains have more than 15 years managerial experience dealing with finance, consultancy and account related profiles.

We have worked with multinational enterprises, Big 4 audit firms and Fortune 500 companies and we advised clients in a diverse range of sectors such as construction, real estate, education, IT services, trading, manufacturing, event management and tourism.

We can advise you on the implications of the OECD global tax deal for your company and how to remain compliant with all existing and forthcoming legislation.

If you need advice on the OECD tax deal or any other related tax, accounting or auditing issue, please get in touch with us on +971 4 3542959 or email us: info@premier-brains.com And we will be happy to assist you.

Please note that this memo is for information purposes only and should not be construed as an advice. It does not necessarily cover every aspect of the
topics with which it deals. You should not act upon the contents of this alert without receiving formal advice on your particular circumstances.

If you would like to discuss Tax & VAT services or ESR or CBcR , please drop us an email at info-oman@premier-brains.com or call us at +968 9808 1315 or +971 4 3542959

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