Global Minimum Tax Agreement
By Oliver Biernat (Benefitax GmbH ), Ashishkumar Bairagra (M L Bhuwania and Co LLP), and Alan Rajah (Lawrence Grant, Chartered Accountants)
The OECD has published detailed rules to assist in the implementation of a landmark reform to the international tax system, which will ensure Multinational Enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023. The agreement has been signed by 136 countries representing more than 90 percent of global GDP.
The OECD confirmed that four countries – Kenya, Nigeria, Pakistan and Sri Lanka had not yet joined the agreement. Estonia, Hungary, and Ireland have newly joined the agreement and it is now supported by all OECD and G20 countries.
Why was a global minimum tax introduced?
The impact of Covid-19 has resulted in huge budget strains on governments around the world and they want to discourage multinationals from shifting profits and tax revenues to low tax countries, regardless of where their sales are made.
Over the years, multinational enterprises have used tax loopholes to shift profits to low tax jurisdictions and this is possible to undertake when there is intangible income such as software, patents and royalties on intellectual property.
OECD mechanism to deal with profit shifting
OECD has published detailed rules on how to assist in the implementation of a landmark reform to the international tax system by introducing Pillar One and Pillar Two model rules. Each pillar addresses a different gap in the existing rules that allow MNEs to avoid paying taxes.
Pillar One applies to about 100 of the biggest and most profitable MNEs and re-allocates part of their profit to the countries where they sell their products and/or provide their services, that is, where their consumers are. Without this rule, these companies can earn significant profits in a market without paying much tax there.
The Pillar Two Model Rules (also referred to as the “Anti Global Base Erosion” or “GloBE” Rules are part of the Two-Pillar Solution to address the tax challenges of the digitalisation of the economy. The Pillar Two Model Rules are designed to ensure large MNEs pay a minimum level of tax on the income arising in each jurisdiction where they operate, creating a more level playing field and further cracking down on tax avoidance. It will be operated on a country-by-country basis.
The new minimum tax rate will apply to companies with revenue above EUR 750m and is estimated to generate around USD 150bn in additional global tax revenues annually.
The detailed Implementation Plan provides for a clear and ambitious timeline to ensure an effective implementation from 2023 onwards. On Pillar One, model rules for domestic legislation will be developed by early 2022 and the new taxing right in respect of re-allocated profit will be implemented through a multilateral convention with a view to allowing it to come into effect in 2023.
As for Pillar Two, model rules to give effect to the minimum corporate tax have been developed and a multilateral instrument will be released by mid-2022 to facilitate the implementation of these rules in bilateral treaties.
Implementation of agreement in USA
The Global Intangible Low-Taxed Income (GILTI) regime, which was enacted in 2017, affects US multinationals to a minimum tax on foreign income. The adoption of the Pillar 2 regime would move toward levelling the playing field for U.S. businesses by ensuring that foreign multinationals also face a minimum tax on their foreign income.
However, the proposed Pillar Two regime imposes a higher effective minimum tax rate than the current GILTI regime. Though Pillar Two’s 15 percent tax rate is only slightly higher than the rate on GILTI, it adopts a more restrictive approach to determining taxable income and tax credits. Under GILTI’s broader approach, U.S. multinationals can still benefit from shifting profits to low tax countries. Pillar Two largely eliminates these benefits and makes it much more challenging for multinationals to exploit tax havens.
Recent proposals from the Biden administration and the House Ways and Means Committee would align the U.S. minimum tax on GILTI with Pillar 2’s narrow approach to income and credits. The House proposal includes other changes to GILTI that are consistent with Pillar 2.
Implementation of agreement in the UK
The UK Government has published a consultation seeking views for how a worldwide 15% minimum corporation tax should be domestically implemented. The consultation seeks views on the application of the global minimum corporation tax in the UK, as well as a series of wider implementation matters, including who the rules apply to, transition rules and how firms within scope should report and pay.
Chancellor of the Exchequer Rishi Sunak said “Ensuring large multinational groups pay the right tax in the right place has been a long-standing priority for the UK.”
Implementation of agreement in the European Union
The EU is pushing the GloBE and is keen on making it work in 2023. However, a multilateral instrument cannot be implemented so easily as it needs to go through parliament and will only come into force three months after the respective state has deposited its instrument of ratification. Since this requires a legislative procedure in the individual contracting states, the effective date may differ.
The European Commission adopted a proposal for a directive to ensure that shall secure that the international GloBE rules are implemented in a uniform, coherent and consistent manner across EU Member States, while being compatible with EU law.
In contrast to the OECD approach, the EU approach differs in the following aspects:
- Pillar Two2 shall apply to domestic companies and to all group parent companies. As a result, large groups of companies fall within the scope of minimum taxation if they have a parent company or a subsidiary in an EU state.
- EU Member States are to be given the option to apply a domestic top-up tax to low-taxed domestic subsidiaries. Thanks to this option, the top-up tax owed by the subsidiaries of a multinational group can be levied locally in the respective Member State instead of at the level of the parent company.
- Minimum taxation shall also apply to purely nationally active groups of companies with a turnover of € 750 million, so that they do not have any advantages over internationally active companies.
- Requirements for the future recognition of taxes by the U.S. tax authorities (since changes in U.S. tax law are imminent) shall be installed
- Sanctions: Fines of up to 5% of the annual turnover of the turnover transacted in the EU.
Implementation of agreement in India
India has been infamous for leading some of the global tax controversies. Starting from the Vodafone case where indirect transfers were brought to tax in India, to strict transfer pricing regulations and assessments which have led to tax litigation, to the introduction of Equalisation Levy for taxing digital transactions, India has been ahead of the curve to make MNEs pay their ‘fair share’ of taxes from their business conducted/generated in India.
There was sufficient anticipation that after signing the agreement in late 2021, the Indian Government will introduce a slew of tax provisions and measures to implement GloBE in the Budget 2022 which was placed on 1st February 2022, but everyone suffered disappointment, since there was no new provisions which were announced which could lead to the implementation of GloBE from 2023 onwards. Infact it was anticipated that India may delete provisions of the Equalisation Levy since deletion of such digital transaction taxes is part of the OECD agreement, but that was done too.
It does seem evident that since the implementation of GloBE is proposed from 2023 onwards, India how the developed countries implement GloBE and may take cue from their regulations to make India’s regulation stronger and more efficient It could also mean that India does not want to give sufficient time to these MNEs to restructure their operations to achieve global tax reduction policies despite implementation of GloBE.
Oliver BiernatGGI member firm
Benefitax GmbH Steuerberatungsgesellschaft Wirtschaftsprüfungsgesellschaft
Advisory, Auditing & Accounting, Corporate Finance, Fiduciary & Estate Planning, Tax
Frankfurt am Main, Germany
Frankfurt am Main, Germany T: +49 69 256 227 60
Benefitax GmbH Steuerberatungsgesellschaft Wirtschaftsprüfungsgesellschaft is a tax consultancy and public auditing company located in Frankfurt, which is widely recognised as the financial centre of Germany. Benefitax predominantly serves German entities of foreign multinational groups, mid-sized German companies with cross-border activities, and wealthy private individuals.
Oliver Biernat is the Founder and Managing Partner of Benefitax. He is a German chartered accountant, certified tax advisor, and specialist advisor for international taxation, with more than 20 years of experience. Since 2008, he has chaired GGI’s International Taxation Practice Group (ITPG), increasing its size to more than 570 experts from 90 countries in the process.
Ashishkumar BairagraGGI member firm
M L BHUWANIA AND CO LLP, Chartered Accountants
Advisory, Auditing and Accounting, Corporate Finance, Fiduciary and Estate Planning, Tax
T: +91 22 6117 49 49
M L BHUWANIA AND CO LLP is a firm dedicated to offering professional services by employing the industry’s brightest minds. They offer collaborative audit, consulting, financial advisory, risk management, and tax services to clients. The firm’s diversified client profile across industries has helped it to improve its ability to advise clients on the dynamic and challenging environments in which they do business.
Ashishkumar Bairagra has been in practice and a Partner of the firm since 2001. He handles international taxation matters, internal audits, management audits, and consulting assignments. His areas of specialisation include international taxation, transfer pricing, valuation, due diligence, cross border business structuring, and business consulting. Ashishkumar is the Global Vice Chairman of GGI’s International Taxation Practice Group (ITPG)
Alan RajahGGI member firm
Lawrence Grant, Chartered Accountants
Advisory, Auditing and Accounting, Fiduciary and Estate Planning, Tax
T: +44 20 8861 7575
Lawrence Grant, Chartered Accountants celebrates its 50th anniversary this year. Based in North London, they have over 30 staff, three partners and two tax consultants providing well-respected accountancy, business support, and cross-border tax advice. They also offer a selection of cloud and digital software solutions using AI technology.
Alan Rajah joined Lawrence Grant in 1994 and became partner in 2001. He is involved in all areas of general practice, specialising in valuations of business, due diligence, and mergers and acquisitions. His client portfolio includes UK and overseas companies and individuals as well as medical professionals. Alan is global vice chairperson of the GGI International Tax Practice Group.
Published: International Taxation Newsletter, No. 16, Spring 2022 l Photo: Johanna Mühlbauer - stock.adobe.com