The OECD, which represents some of the largest world economies, announced on Thursday that 130 countries had agreed to a two-pillar framework that would force multinational enterprises to pay their fair share of tax by implementing a two-pillar framework.
The first pillar proposes a fairer distribution of profits and taxing rights of some of the world’s largest multinational enterprises, including digital companies, by in some cases re-allocating taxing rights from a company’s home country to the markets where they conduct their business and earn the majority of their profits, regardless of whether the business has a physical presence there.
Under the first pillar, taxing rights on more than US$100 billion in profit will be expected to be reallocated to market jurisdictions each year.
The second pillar proposes a competition and corporate income tax floor, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.
The second pillar would see the establishment of a minimum corporate tax rate of at least 15 per cent, and is estimated to generate around US$150 billion in additional global tax revenue every year. The OECD suggests that, as well as raising revenue, the second pillar will have the added benefit of stabilising the international tax system.
It’s a line of thinking which was adopted by the G7 in early June.
The seven — which include Canada, France, Germany, Italy, Japan, the United Kingdom, the United States, and representatives of the European Union — agreed to a global tax floor of 15 per cent on Sunday as part of a unified effort to crack down on tech companies like Facebook and Google who, under the agreement, will now have to pay tax in the countries they operate in.
The OECD said their two-pillar package will provide much-needed support to governments who need to raise necessary revenue to repair their budgets and balance sheets while investing in essential public services and infrastructure in the wake of COVID-19.
“After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere,” OECD Secretary-General Mathias Cormann said.
“This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions.
“It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year.”
According to the OECD, the new framework updates “key elements” of the international tax system, which is more than 100 years old and no longer fit for purpose in a globalised, digital economy.
John Buckley is a journalist at Accountants Daily.
Before joining the team in 2021, John worked at The Sydney Morning Herald. His reporting has featured in a range of outlets including The Washington Post, The Age, and The Saturday Paper.