On 1 July 2021, 130 countries, including Poland, issued a joint statement affirming support for establishing a new global corporate taxation framework, with respect to the largest MNEs (Multinational Enterprises), including digital companies.
The countries endorsed introduction of solutions for global taxation of large corporates benefiting from progressing globalization and digitization, including new rules of allocation of income to market jurisdiction and adoption of a global minimum tax. The statement is a starting point for further international negotiations on a global minimum corporate tax regime.
The Statement supports updating the century-old international corporate tax framework, under which the right to tax a company depended on the entity’s physical presence in a given country.
The Statement was signed by 130 out of 139 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting 2.0 (BEPS 2.0). The countries that have not joined the Statement are: Estonia, Hungary, Ireland, Barbados, Kenya, Nigeria, Peru, St. Vincent and the Grenadines, and Sri Lanka.
Just as in the case of OECD reports published in October 2020, addressing the tax challenges arising from digitalization of the economy, the Statement covers two pillars: Pillar One provides for relocation of a portion of profits for global corporates to jurisdictions in which the profits are earned, while Pillar Two provides for introduction of a global minimum tax.
Importantly, the proposed measures partially differ from those proposed earlier by OECD.
Pillar 1: New rules of profit relocation
Pillar One encompasses activities aimed at developing new rules regarding place of income and allocation of profits to countries where the sales arise (i.e. market jurisdictions).
According to the Statement, Pillar One is to cover MNEs with global turnover above EUR 20 billion and profitability (i.e. profit before tax/revenue) above 10 percent. The turnover threshold is to be reduced to EUR 10 billion, 7 years after Pillar One comes into force, contingent on its successful implementation. Entities meeting the above-listed criteria will be required to allocate a portion of the “surplus” profit (referred to as residual profit) to countries where they sell goods or render services.
The taxation mechanism elaborated under Pillar One will involve three elements:
- Amount A – mechanism of partial redistribution of profits of large multinationals involved with “consumer facing businesses” (CFB) and “automated digital services” (ADS) to those countries where the consumers of goods and services sold by the entities are located (i.e. market jurisdictions);
- Amount B – a mechanism intended to streamline the application of the arm’s length standard to baseline marketing and distribution activities;
- Tax certainty – a dispute prevention and resolution mechanisms, which will allow to avoid double taxation for Amount A (with a possibility to be extended to other tax disputes).
Furthermore, for in-scope MNEs, between 20-30 percent of residual profit (defined as profit in excess of 10 percent of revenue) will be allocated to market jurisdictions with nexus using a revenue-based allocation key.
Pillar 2: Global minimum tax
Pillar Two provides for introducing a global minimum corporate tax that countries can use to protect their tax bases. The main goal thereof is to hinder shifting untaxed income from the countries where it was generated to jurisdictions pursuing harmful tax competition practices (tax havens).
The minimum tax rate used for these purposes will be at least 15 percent. Importantly, this rate may be increased as international negotiations on the implementation of Pillar Two progress.
The Statement provides that the new taxation mechanisms will apply to MNEs with global consolidated annual income exceeding the EUR 750 million threshold.
At the same time, according to the Statement, the minimum tax is to be designed in such a way that it does not increase the tax burden on entities conducting actual business activity in a given state. To achieve it, a formulaic substance carve-out will be provided.
Government entities, international organizations, non-profit organizations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities, organizations or funds will be excluded from the scope of application of the new rules.
along with the remaining elements of the framework (including detailed mechanisms supporting both pillars) will be finalized in October 2021.
The multilateral instrument through which rules set forth by each Pillar are implemented will be developed and opened for signature in 2022.
Implementation is planned for 2023, when the solutions brought by Pillar One and Pillar two (with the possibility of partial postponement of implementation of some of their elements) are to come into effect.
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