OECD Tax Accord

October 21st, 2021

digital world map

OECD accord imposes global minimum corporate tax of 15%

Over 130 countries have signed an OECD accord that enables them to raise tax on sales made by multinational enterprises within their borders.  The two-pillar package aims to ensure that large Multinationals pay tax where they operate and earn profits, while adding certainty and stability to the international tax system.

The deal, agreed in principle at the London G7 summit, is the outcome of negotiations coordinated by the Organisation for Economic Co-Operation and Development (OECD) for much of the last decade.  The OECD describe the “landmark deal” as a significant milestone towards ending decades of countries undercutting their neighbours on tax.

Two Pillars

The first pillar is designed to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest multinationals, including digital companies.  It would re-allocate some taxing rights over companies from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.

The OECD said that more than $125bn (£92bn) of corporate profits from about 100 of the world’s largest and most profitable multinationals would be reallocated under this first pillar.

The second pillar will set a global minimum tax rate at 15% on large companies to be imposed by 2023. Although stating the plan would not eliminate tax competition, the agreement sets rules limiting a race to the bottom on tax.  The OECD believe that the rate would would generate an extra $150bn for governments around the world each year.

Converting Holdouts

In previous negotiating rounds, countries including Ireland, Hungary and Estonia, have held out from granting their approval.  However, all but four have now agreed to the latest plans, meaning that all 38 OECD member countries and the G20 group of the world’s most advanced economies would be part of the reforms.

Ireland dropped its resistance to the plan following the removal of the phrase “at least” from an earlier draft text, which had pledged a global minimum tax of “at least 15%”.  The EU also provided assurances to Ireland (whose corporation tax rate is 12.5%) that the rate would not be increased further down the line. The global tax floor will also only apply to the biggest firms, with annual revenues of €750m.

Historic Reforms

“After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere,” OECD Secretary-General Mathias Cormann said.  “This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions. It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year.”

130 countries and jurisdictions, representing more than 90% of global GDP, joined the Statement establishing a new framework for international tax reform. Four countries – Kenya, Nigeria, Pakistan and Sri Lanka – did not join the latest statement.  The remaining elements of the framework, including the implementation plan, will be finalised in October.

The OECD said countries involved in the deal would aim to sign a multilateral convention next year, with effective implementation of the tax reforms in 2023.  To talk through what this accord means for your business or how it may influence your plans to land and expand overseas, please feel free to contact Briars.

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Kate Jolly

Kate co-founded Briars in 1991 with Andrew Brierley. She specialised in tax law and today continues to advise clients on international operations, particularly land, expand and exit! In her spare time Kate is a Past Master of the City of London Guild of Entrepreneurs and a Director of CCARHT (Cambridge Centre for Applied Research into Human Trafficking).