The Organisation for Economic Co-operation and Development (OECD) has been targeting proposals to reduce incentives for tax planning and avoidance by U.S. and foreign multinational companies by limiting tax competition and changing where companies pay taxes. OECD Pillar One would expand a country’s authority to tax profits from companies that make sales into their country but don’t have a physical location there. This was decided as part of the OECD/G20 Inclusive Framework.
What Is the OECD Global Tax Deal?
The Global Tax Deal is a significant shift in international tax rules. The Base Erosion and Profit Shifting (BEPS) project in 2015 and later Digital Services Tax (DST) proposals were attempts to change tax rules for multinational corporations. BEPS harmonized some tax rules and DSTs were meant as temporary policies targeted at large, digitalized business models.
The OECD’s current proposal is divided into two independent plans: Pillar One and Pillar Two. Pillar One’s impact would result in some companies paying more taxes in the countries where end users for a company’s products are located or digital users are, even if the company has no permanent local establishment in that country.
What Is the Aim of OECD Pillar One?
In the last few years, the OECD has discussed a more permanent and effective plan to change tax rules for large companies and continue to limit tax planning by multinationals. Pillar 1 is focused on changing where companies pay taxes. (Pillar 2 would establish a global minimum tax.)
For companies with global revenues of more than €20 billion (US $26.4 billion) and profitability above 10 percent, 25 percent of profits above 10 percent would be taxed according to a new formula based on where a company’s customers are located.
Pillar 1 would also include dispute resolution processes meant to improve tax certainty for companies.
According to initial analysis of the original proposals, Pillar 1 and Pillar 2 would increase the effective average tax rate by around 0.7 percent across all jurisdictions. Pillar 1 is responsible for only .1 percent of this increase.
How Could this Impact U.S. and Foreign Multinationals?
The plan would impact U.S. and foreign multinationals by:
- Limiting tax planning
- Increasing effective tax rates on cross-border investment
- Increasing taxes on earnings in low-tax jurisdictions
- Discouraging foreign direct investment (FDI)
- Impacting where companies hire and invest globally and domestically
- Slowing global economic growth
- Providing additional tax certainty and stabilization
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