On 5 June 2021, at the G7 meeting in London, the G7 finance ministers reached agreement, in principle, to key elements of the global tax reform set out in the OECD BEPS 2.0 plan. The reform provides for a new basis of allocating a portion of the profits of large multi-national corporations (MNC) to be taxable in market jurisdictions and also that a global minimum tax rate of at least 15% should apply to profits of MNCs.
Minister Donohoe attended the G7 in his role as President of the Eurogroup. In response to the G7 agreement, he tweeted “I note the joint position by #G7 finance ministers on international corporate taxation. It is in everyone’s interest to achieve a sustainable, ambitious and equitable agreement on the international tax architecture. I look forward now to engaging in the discussions at @OECD. There are 139 countries at the table, and any agreement will have to meet the needs of small and large countries, developed and developing.”
OECD BEPS 2.0 blueprints
OECD BEPS 2.0 has its origins in addressing the tax challenges arising from digitalisation. In October 2020, the OECD published two reports, on Pillar One and Pillar Two.
Pillar One seeks to introduce a new international framework under which more of the profits of global multi-nationals would be allocated to market jurisdictions using a formulaic approach. The Pillar One provisions would apply to automated digital services (ADS) and consumer facing businesses (CFBs). The calculations proposed are complex and take as a starting point a group’s consolidated profit. It also looks at fixed threshold percentage profits and contemplates there being ranges of “acceptable” profit margins for certain businesses. Where a business exceeds the threshold profit percentages, part of the “excess profits” are allocated to market jurisdictions that meet a nexus threshold. The G7 confirmed that where a business exceeds a 10% profit margin threshold, 20% of the profits above the 10% margin will be reallocated to the market jurisdiction. MNCs will be in scope where global revenues exceed a certain threshold (€750m was suggested by OECD but this has yet to be agreed) and foreign source income exceeds a lower threshold in their consolidated accounts.
Pillar Two seeks to implement a global minimum tax rate for MNCs on a jurisdiction by jurisdiction basis. There are four separate parts to Pillar Two which overall seek to impose additional tax liabilities where the effective tax rate paid by a MNC in any jurisdiction is below a set minimum rate. The G7 confirmed agreement of a minimum effective tax rate of at least 15%. It is proposed that Pillar Two would apply to MNCs with global revenues in excess of €750m. The effective tax rate will be based on de-consolidating the consolidated accounts of the parent company and therefore the accounting treatment will be key. The details behind how the effective tax rate will be calculated has yet to be finalised. Whilst consensus by the Inclusive Framework on a global minimum tax rate does not compel a jurisdiction to modify their corporate tax rates and regimes to at least meet the agreed minimum effective rate, the framework of Pillar Two includes a set of coordinated measures designed to top-up the tax on cross-border income that falls below the agreed minimum tax. The top-up tax could be imposed by either the jurisdiction in which the parent company of an entity is located (through an income inclusion regime) or by a jurisdiction from which deductible payments are made (through an undertaxed payments rule).
Digital Services Tax
In addition to the BEPS 2.0 agreement, the G7 also agreed to provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies. This will be a welcome consequence of the adoption of BEPS 2.0 as more countries have sought to introduce unilateral digital service tax regimes.
The EU announced, in May, as part of its ‘Business Taxation for the 21st Century’ communication, a proposal to introduce a digital levy that is compliant with BEP 2.0. Further details on the EU digital levy are expected in July.
Countries that are being required to eliminate their DSTs will want to be certain that the US Administration can get approval for the BEPS proposals, in particular for the Pillar One component. It will therefore be important to keep an eye on the US Congressional approval process over the next few months.
The OECD Secretary-General Mathias Cormann welcomed the agreement reached by the G7 Finance Ministers on key elements of international tax reform included in BEPS 2.0, noting it will help build momentum to obtain consensus within the Inclusive Framework. Further announcements by the OECD on BEPS 2.0 are expected in July and October this year.
Readers will note that the G7 comprises of the United Kingdom, Canada, France, Germany, Italy, Japan, the United States. Notably China has not yet confirmed agreement of the BEPS global tax reform measures. The next G20 meeting where BEPS 2.0 is likely to be discussed is in early July. The OECD Inclusive Framework comprises 139 countries and jurisdictions and consensus will be sought from the Inclusive Framework before the proposals can be finalised.
The timeline for adoption of global tax reform remains unclear. It is anticipated any BEPS 2.0 measures agreed upon by the Inclusive Framework will be adopted through a combination of domestic law changes and a multilateral convention. Any changes within the EU are likely to be adopted by way of a Directive.
Impact for Ireland and Irish businesses
Corporation tax revenues have been remarkably resilient in Ireland in 2020, notwithstanding the COVID-19 crisis. While Ireland will have to borrow significantly to fund Budget commitments, this resilience was important in framing Budget 2021. As confirmed in the National Economic Recovery Plan 2021, the impact on exchequer receipts of the OECD BEPS 2.0 reform is expected to be a reduction in corporate tax receipts by €2billion, circa 20%. It is expected most of this reduction will arise due to the adoption of Pillar One measures. It is unclear how the adoption of a global minimum tax rate of 15% will impact Irish corporate tax receipts.
Minister Donohoe has confirmed several times in 2021 that Ireland will continue to work towards agreement at OECD level and that a 12.5% corporate tax rate is fair and within the ambit of healthy tax competition.
The pace of international tax reform is building momentum as countries switch their focus from COVID recovery to long term economic growth. As final tax reform proposals move ever closer, it will be important for all large businesses who are likely to be in scope to understand the impact of these proposals on their business, and in particular, on their likely effective tax rate and on the additional resources required to comply with the complex measures.
If your business is potentially affected by these proposals, please contact your KPMG team that can assist you with advice including modelling how the proposed BEPS 2.0 changes will impact your business.
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If you have any queries on the impact of corporate tax changes for your business, please contact Tom Woods or any member of our Tax team. We’d be delighted to hear from you.