In recent years, the world has discussed important changes in international taxation rules that affect multinational companies. In the last quarter of 2023, after talks at the Organization for Economic Cooperation and Development (OECD), more than 130 member jurisdictions consented to a new taxation project.
Large corporations pay more taxes in countries where they have customers and less in countries where they have headquarters, employees and operations. In addition, the agreement establishes a minimum global tax of 15%, which increases taxes for companies based in low taxation jurisdictions.
Governments are developing implementation plans and signing the agreement into effect.
The OECD proposal follows a plan that has been debated on since 2019. There are two “pillars” of reform: the first pillar changes where large companies pay taxes (impacting approximately US$125 billion in profits); The second pillar introduces the global minimum tax (increasing tax revenue by approximately US$ 150 billion worldwide).
Delays in implementation and disagreements on political details have pushed back the timeline for a full agreement on the first pillar toward the mid-2023 and implementation of the second pillar by 2024 at the earliest.
The first pillar covered the “value A” which applies to companies with more than 20 billion euros of revenue and a profit margin of greater than 10%. A portion of the profits of these companies are taxed in the jurisdictions where they sell. 25% of profits above the 10% margin may be taxable. After a seven-year review period, the € 20 billion limit could be reduced to € 10 billion.
The “value A” is a limited redistribution of tax revenues from the countries in which a large multinational company operates for the countries where its customers are located. Most of these companies are American companies.
The first pillar also contains the “value B”, which provides companies with a more agile way of calculating taxes on overseas operations such as marketing and distribution.
The second pillar is a global minimum tax. It consists of three main rules and a fourth rule for tax treaties. These rules apply to companies with revenues greater than € 750 million. Model rules will be published in December 2021.
Written by Marcos Ferreira, Content Assistant to Drummond Advisors
