In recent years, countries have been discussing significant changes in international tax rules affecting multinational companies. In October 2021, following negotiations at the Organization for Economic Co-Operation and Development (OECD), more than 130 member jurisdictions agreed on a draft for new tax rules.

Large companies will pay more taxes in the countries where they have customers and less in the countries where they have their headquarters, employees and operations. In addition, the agreement introduces a global minimum tax of 15%, which increases taxes on companies with earnings in low-tax jurisdictions.

The latest draft rules outline where companies will pay tax under ‘Amount A’. These Codes include approaches to identifying end consumers even when a company is selling to another business in a long supply chain. The draft rules also allow companies to use macroeconomic data on consumer spending to allocate their taxable profits.

‘Column One’ also includes ‘Amount B’, which provides a simpler method for companies to calculate taxes on foreign activities such as marketing and distribution.

‘Pillar Two’ is the global minimum tax. It contains three main rules and a fourth rule for tax treaties. These rules apply to companies with revenues of more than 750 million euros. Model rules were published in December 2021.

The first is the ‘Domestic Minimum Tax’, which countries can use to claim the first right to tax profits currently taxed below the minimum effective rate of 15%.

The second is the ‘Income Inclusion Rule’, which determines when a company’s foreign income should be included in the parent company’s taxable income. The agreement sets the minimum effective tax rate at 15%, otherwise additional taxes will have to be paid in a company’s home country.

The inclusion rule will apply to foreign profits less 8% of the value of tangible assets (such as equipment and facilities) and 10% of wage (payroll) costs. These deductions will be reduced to 5% each over a 10-year transition period.

After months of negotiations, the European Union (EU) has unanimously decided to implement the ‘Second Pillar’. The ‘EU Directive’ will need to be implemented into the national laws of each country by the end of 2023. Companies with an annual turnover of at least 750 million euros will start paying the 15% minimum rate from 2024. This includes entirely indigenous groups that meet the income threshold.

Member States with more than 12 multinational groups in scope must apply the Income Inclusion Rule from 31 December 2023 and the Undertaxed Profits Rule from 31 December 2024. Member States with fewer than 12 members may postpone the application of both rules for six years.

The Rules explicitly encourage subsidies to businesses to offset some of the increased costs from minimum tax. This is because standard tax deductions are at a disadvantage compared to Government grants and refundable deductions. The agreement represents a major change for tax competition and many countries will be rethinking their tax policies for multinational companies.


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