Pillar 2 of the Organisation for Economic Co-operation and Development’s (OECD) Global Tax Deal would limit tax competition and the so-called “race to the bottom” on corporate income tax rates. It would establish a minimum effective tax rate applied to cross-border profits of large multinational corporations that have a “significant economic footprint” across the world, in the form of a global minimum tax. The proposed global minimum tax rate is 15 percent.
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 plan aims 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. This was decided as part of the OECD/G20 Inclusive Framework.
To achieve this, the proposal is divided into two independent plans: Pillar One and Pillar Two.
What is the Aim of OECD Pillar Two?
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. This plan was broken into two pillars: Pillar One is focused on changing where companies pay taxes, and Pillar Two would establish a global minimum tax.
Specifically, Pillar Two would establish a minimum effective tax at a proposed rate of 15 percent applied to cross-border profits of large multinational corporations that have a “significant economic footprint” across the world. Pillar Two would also include dispute resolution processes meant to improve tax certainty for companies.
Pillar Two includes three rules that apply to companies with more than €750 million ($991.9 million) in revenues.
- Income inclusion rule: determines when a company’s foreign income should be included in the parent (main) company’s taxable income.
- Under-taxed profits rule: allows a country to increase taxes on a business if that business is part of a larger company that pays less than 15 percent in another jurisdiction.
- Subject to tax rule: makes it possible for countries to tax inter-company payments that would be under-taxed.
According to initial analysis of the original proposals, Pillar One and Pillar Two would increase the effective average tax rate by around 0.7 percent across all jurisdictions. Pillar Two, the global minimum tax, is responsible for the majority of this increase, accounting for a 0.6 percent increase.
How Could This Impact U.S. and Foreign Multinationals?
Pilar II and the broader global tax deal 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
- Introducing additional tax complexity
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