OECD: Agreement for global minimum tax, to resolve international taxation of digital economy

Certain multinational enterprises (MNEs) will be subject to a minimum 15% tax rate, effective from 2023.

Certain multinational enterprises (MNEs) will be subject to a minimum 15% tax rate.

The Organisation for Economic Cooperation and Development (OECD) today announced that 136 countries and jurisdictions—of the 140 members of the OECD/G20 Inclusive Framework on base erosion and profit shifting—have agreed that certain multinational enterprises (MNEs) will be subject to a minimum 15% tax rate, effective from 2023.

According to the OECD release, the agreement will reallocate certain taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits—regardless whether the MNEs have a physical presence there. 

A related release from the U.S. Treasury Department notes that:

As of this morning, virtually the entire global economy has decided to end the race to the bottom on corporate taxation. In its place, more than 130 nations—including all 20 in the G20—have agreed to a new and specific set of provisions to uniformly tax the income of multinational companies, including a global minimum tax.

The 136 jurisdictions joined the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy that updates and finalizes a July 2021 political agreement by members of the Inclusive Framework that will fundamentally reform international tax rules.

The OECD noted:

  • With Estonia, Hungary, and Ireland having joined the agreement, it is now supported by all OECD and G20 countries.  
  • Four countries (Kenya, Nigeria, Pakistan, and Sri Lanka) have not yet joined the agreement.
  • The two-pillar solution will be delivered to the G20 Finance Ministers meeting in Washington, D.C. on 13 October 2021, and then to the G20 Leaders Summit in Rome at the end of October 2021.
  • Under Pillar One, taxing rights on more than U.S. $125 billion of profit are expected to be reallocated to market jurisdictions each year. Specifically, MNEs with global sales above €20 billion and profitability above 10% will be covered by the new rules, with 25% of profit above the 10% threshold to be reallocated to market jurisdictions.
  • Pillar Two introduces a global minimum corporate tax rate set at 15%.  The new minimum tax rate will apply to companies with revenue above €750 million and is estimated to generate around U.S. $150 billion in additional global tax revenues annually. Further benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.

What’s next?

The OECD reported that countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023. The convention is already under development and will be used to implement the newly agreed taxing right under Pillar One, as well as for the standstill and removal provisions in relation to all existing digital service taxes and other similar relevant unilateral measures.

The OECD will develop model rules for bringing Pillar Two into domestic legislation during 2022, to be effective in 2023.

 

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.