On July 1, 2021, the Organisation for Economic Cooperation and Development (OECD) announced that 130 countries and jurisdictions had signed a two-pillar statement for a global minimum corporate tax rate. Included among the signatories were all of the G20 countries, representing more than 90% of global GDP, and jurisdictions commonly regarded as tax havens, such as the Cayman Islands and Gibraltar. The signatories agreed that multinationals should be required to pay a minimum tax rate of 15% in each country they operate in. Sources close to the negotiations reported that the tax-haven jurisdictions clearly realized that “the writing was on the wall.” The agreement follows the June 2021 announcement on a “seismic” tax reform agreement by the G7.
Some countries involved in the negotiations, including Ireland, Hungary, and Estonia, did not sign the two-pillar statement, but remain part of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
The BEPS Project and the OECD/G20 Inclusive Framework
The OECD describes BEPS as “tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.” The G20 countries put addressing tax evasion and avoidance at the top of their agenda following the 2008 financial crisis, and in accordance with that goal initiated the Inclusive Framework in 2016. The Inclusive Framework is led by a 24-country Steering Group and works to incorporate the BEPS Action Plan’s three core principles of coherence, substance, and transparency into the global corporate taxation system.
The OECD/G20 BEPS Project includes 15 Actions to tackle tax avoidance. The Inclusive Framework, for its part, has two pillars: (1) solutions for determining the allocation of taxing rights and (2) the design of a system to ensure that multinational enterprises pay a minimum level of tax on profits.
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.
In Secretary-General Cormann’s Tax Report to the G20 this month, he highlighted the work that the OECD is doing on the tax challenges arising from the digitalization of the economy, as well as the issues of tax policy and climate change, and tax and development.
The deadline for Inclusive Framework Members to finalize the remaining technical work on the two-pillar approach is October 2021, with the goal of effective implementation of the Inclusive Framework by 2023.