136 countries, representing more than 90% of global GDP, have signed up to the OECD/G20 statement on the two-pillar approach to address the tax challenges arising from the digitalisation of the economy. G20 finance ministers were expected to endorse the agreement on 13 October 2021, and the final agreement will be presented to the G20 Leaders Summit in Rome on 30/31 October 2021.
Both pillars are expected to be implemented in 2023. Welcoming the agreement, OECD Secretary-General Mathias Cormann said: ‘This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy.’
Although the agreement has been widely welcomed, not all economists agree with the design of the proposals. Writing in Le Monde, in an open letter, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) – a group of internationally recognised economists and academics – has criticised key aspects of the plans.
Under pillar one, the OECD anticipates that more than $125 of profits from 100 of the world’s largest MNEs will be reallocated annually, to ensure profits are taxed where they are generated. MNEs with global sales over €20bn will be within the scope of pillar one, with 25% of profit above a 10% profitability threshold to be reallocated to market jurisdictions. According to the OECD, ‘developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues’.
The ICRICT takes a different view, noting that only a fraction of the profits of those 100 companies within scope will be affected, and that signatory countries will agree not to introduce their own taxes on MNEs unilaterally – and to withdraw any already in place. This appears to overlook proposals made by developing countries during earlier negotiations for all companies to pay taxes in the countries where their economic activities take place. The group also notes concerns around arbitration mechanisms in cases of dispute, which risk favouring the most wealthy countries.
The pillar two 15% minimum tax rate will apply to companies with revenue over €750m, and could generate around $150bn in additional global tax revenues annually, estimates the OECD.
ICRICT argues that a more robust minimum tax rate could have generated far more in new tax revenues worldwide – describing agreement on the 15% minimum tax rate as a victory for Ireland and a defeat for the rest of the world, with developing countries (already most heavily affected by corporate tax evasion) particularly losing out, and noting that small and medium-sized companies would also be impacted by continuing to pay tax at the relevant local rates.
ICRICT also points out that developing countries not only rely heavily on tax receipts to sustain economic growth but also suffer wide inequality compared to their wealthier counterparts, a situation brought into sharp focus during the pandemic. In the interests of global solidarity, and in furtherance of the United Nations sustainable development goals, the group urges the G20 to view the agreement as an interim solution to ensure the voices of developing countries are taken into account in continuing negotiations.
136 countries, representing more than 90% of global GDP, have signed up to the OECD/G20 statement on the two-pillar approach to address the tax challenges arising from the digitalisation of the economy. G20 finance ministers were expected to endorse the agreement on 13 October 2021, and the final agreement will be presented to the G20 Leaders Summit in Rome on 30/31 October 2021.
Both pillars are expected to be implemented in 2023. Welcoming the agreement, OECD Secretary-General Mathias Cormann said: ‘This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy.’
Although the agreement has been widely welcomed, not all economists agree with the design of the proposals. Writing in Le Monde, in an open letter, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) – a group of internationally recognised economists and academics – has criticised key aspects of the plans.
Under pillar one, the OECD anticipates that more than $125 of profits from 100 of the world’s largest MNEs will be reallocated annually, to ensure profits are taxed where they are generated. MNEs with global sales over €20bn will be within the scope of pillar one, with 25% of profit above a 10% profitability threshold to be reallocated to market jurisdictions. According to the OECD, ‘developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues’.
The ICRICT takes a different view, noting that only a fraction of the profits of those 100 companies within scope will be affected, and that signatory countries will agree not to introduce their own taxes on MNEs unilaterally – and to withdraw any already in place. This appears to overlook proposals made by developing countries during earlier negotiations for all companies to pay taxes in the countries where their economic activities take place. The group also notes concerns around arbitration mechanisms in cases of dispute, which risk favouring the most wealthy countries.
The pillar two 15% minimum tax rate will apply to companies with revenue over €750m, and could generate around $150bn in additional global tax revenues annually, estimates the OECD.
ICRICT argues that a more robust minimum tax rate could have generated far more in new tax revenues worldwide – describing agreement on the 15% minimum tax rate as a victory for Ireland and a defeat for the rest of the world, with developing countries (already most heavily affected by corporate tax evasion) particularly losing out, and noting that small and medium-sized companies would also be impacted by continuing to pay tax at the relevant local rates.
ICRICT also points out that developing countries not only rely heavily on tax receipts to sustain economic growth but also suffer wide inequality compared to their wealthier counterparts, a situation brought into sharp focus during the pandemic. In the interests of global solidarity, and in furtherance of the United Nations sustainable development goals, the group urges the G20 to view the agreement as an interim solution to ensure the voices of developing countries are taken into account in continuing negotiations.
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