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OECD Issues Statement On Two Pillar Solution To Address The Tax Challenges Arising From The Digitalisation Of The Economy

Monday 5th July 2021

The OECD/G20 Inclusive Framework on BEPS has announced the latest position on the two-pillar solution to address the tax challenges arising from the digitalisation of the economy.

The two-pillar solution represents the outcome of latest negotiations coordinated by the OECD for much of the last decade. It aims to ensure that large MNEs pay tax where they operate and earn profits.

Pillar One is to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there. Under Pillar One, taxing rights on more than USD 100bn of profit are expected to be reallocated to market jurisdictions each year.

In-scope companies will include MNEs, but not those involved in extractives or regulated financial services, with global turnover above 20bn euros and profitability above 10%. Between 20-30% of profit in excess of 10% of revenue will be allocated to market jurisdictions with nexus using a revenue-based allocation key.

Where the residual profits of an in-scope MNE are already taxed in a market jurisdiction, a marketing and distribution profits safe harbour will cap the residual profits allocated to the market jurisdiction through Amount A. Further work on the design of the safe harbour will be undertaken, including to take into account the comprehensive scope.

Double taxation of profit allocated to market jurisdictions will be relieved using either the exemption or credit method, whilst the entity (or entities) that will bear the tax liability will be drawn from those that earn residual profit.

Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases. It is estimated that the minimum tax rate of at least 15% will generate around USD 150bn in additional global tax revenues annually.

130 OECD member countries and jurisdictions, representing more than 90% of global GDP, have supported the Statement to establish the new framework for international tax reform, whilst 9 members have yet to join. The remaining elements of the framework, including the implementation plan, are to be finalised in October 2021, with a plan for effective implementation in 2023.

If you would like further information on the above, please contact Keith Rushen on 0207 486 2378.

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