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Global Tax Reform

The golden window to model your path forward

Article by Albert Baker | Posted: 21 Sep. 2021 ⌚ 4 min. read

On 10, July 2021 the G20 Finance Ministers issued a Communiqué1 endorsing a Statement2 issued by the Inclusive Framework (IF) that as of July 1, 2021, had been signed by 132 out of 139 member countries of the IF. The statement sets out a high-level political agreement regarding global tax reform. Specifically, it addresses the so-called Pillar 1/Pillar 2 project that has been led by the OECD and is focused on reallocating certain profits to ‘market jurisdictions’ on a new formulaic basis (Pillar 1) and implementing a global minimum tax (Pillar 2). The implementation is planned for 2023.

What we know

Under Pillar 1, businesses with a global annual turnover exceeding €20 billion and profitability above a 10% margin, will be required to reallocate 20%-30% of their residual profit above the 10% threshold, to market countries (essentially the countries where the users are based or the goods are consumed) using a revenue-based allocation key. It is estimated that initially this would apply to approximately 100 of the largest and most profitable companies in the world. Extractives and regulated financial services are excluded. The agreement provides for a removal of the unilateral Digital Services Tax (DSTs) introduced by several countries.

The Pillar 1 reallocation of profits will be done using a formula rather than applying traditional transfer pricing/permanent establishment rules and the profit to be allocated will be largely based on a company’s group consolidated financial accounting income (with a limited number of adjustments), rather than focusing on separate legal entities and the otherwise calculated income for tax purposes.

Pillar 2 introduces a minimum effective tax rate of at least 15%, calculated based on specific rules. The primary mechanism in Pillar 2 requires that groups with an effective tax rate below the minimum in any particular jurisdiction would be required to pay a top-up tax to their head office jurisdiction. Effective tax rate calculations will use a tax base determined by reference to financial accounts, subject to agreed adjustments and mechanisms to address timing differences. While countries could opt for a lower threshold the base case would be for these rules to be applied to groups with consolidated revenue of at least €750 million.

In a recent article “A path forward: Five priorities for tax leaders” we identified the Pillar 1/ Pillar 2 project (and related DSTs) as some of the priority areas for business. This is even more true now given the current momentum (see the related tax@hand article3 and webcast “G20/OECD The Digitalised Economy4). Below we set out what to expect in the coming months along with some suggested action steps in order to prepare for these developments.

How you can prepare

There are three action steps that tax leaders can take now while there is a window of time to prepare:

Tax teams need to be able to assess the impact of the proposals from an overall tax burden, cash flow and financial reporting perspective, and communicate with stakeholders.

The complexities and interdependencies are such that the impact cannot be assessed intuitively. Modelling and scenario planning will be required. You can explore the potential impact of Pillar 1 on your organization here.

Groups also need to be able to assess whether they have the in-house expertise and technology capabilities to comply with the proposals. For some groups this may mean overhauling legal entity and supply chain structures.

While the IF Statement sets out a five-page conceptual political agreement on a number of matters, many political and technical design issues are yet to be resolved. Businesses impacted by the measures being proposed should engage in the debate so that their voices are heard. While the ambitious implementation timeline does not seem to allow a full public consultation, businesses can engage directly or via trade and business associations and the outreach can be to the OECD Secretariat, or through local country officials who are participating in the negotiations.

Developments are going to happen as the global agreements require local legislative implementation. With all the change that’s coming, monitoring those developments, as well as evaluating the impact on the businesses (e.g. impact on existing supply chains, new compliance requirements, etc.) will be required.

Looking beyond

The July 10th G20 Communiqué accurately described the agreement as historic. There is still a vast amount of work to be done before it can be implemented, but reaching agreement required a lot of cooperation between countries and expended a lot of political capital.

Failure to reach a final agreement may result in an onslaught of new uncoordinated unilateral measures that would contribute to even more complexity, double tax and potentially trade disputes and tariffs thereby hampering cross-border trade, investment, and growth.

While political and technical/design issues remain to be resolved there is momentum for change. With the G20 endorsing the OECD IF agreement, now is the time to be engaged and to assess the impact.

1 Third Finance Ministers and Central Bank Governors meeting | G20 Italia 2021

2 Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy | OECD

3 Inclusive framework statement agrees taxation of digital economy, global minimum rate | Deloitte article

4 G20/OECD The Digitalised Economy – Political Agreement On Taxation Of Digital Economy (Pillar One) And Global Minimum Rate (Pillar Two) | Deloitte webcast

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