Implementing Pillar One & Pillar Two
Building upon work conducted for several years on how to adapt the international tax rules to an increasingly digitalised economy, the OECD/G20 Inclusive Framework proposes a two-pillar overhaul of the existing system as from 2023/2024. While the main policy features are agreed, detailed model rules and draft multilateral conventions are due to be released over 2022.
Tax directors and their teams can already model the impact, prepare for the additional tax compliance burden and assess opportunities for manageable restructurings to mitigate the increased complexity.
Pillar One seeks to create a new taxing right for market jurisdictions on “Amount A”. This new taxing right is independent of physical presence and will be determined based on a formulaic approach. It will only apply to MNE groups with both a global turnover in excess of EUR 20 billion and a pre-tax profit margin above 10%. The scope may be broadened in the future by decreasing the turnover threshold to EUR 10 billion. Pillar One also entails simplifications to the transfer pricing approach to “baseline” marketing and distribution functions, as well as mandatory and binding dispute prevention and resolution mechanisms to mitigate the risk of multiple taxation.
Pillar Two seeks to enforce a global minimum corporate income tax at an effective rate of 15%, calculated on a jurisdiction-per-jurisdiction basis. It will apply to MNEs that meet the EUR 750 million threshold as determined under Country-by-Country rules, but a lower threshold may be applied at the discretion of implementing countries. Pillar Two consists in a mix of measures giving taxing rights to the jurisdiction of the group’s ultimate parent and to the jurisdictions of entities making intragroup payments to low-taxed group companies or jurisdictions.