Final details on global tax reform imminent

The existing international tax rules no longer provide a fair system for taxing businesses where value is created. Increased globalisation and digitalisation of the economy means that many businesses can operate successfully in a jurisdiction without any (taxable) physical presence there, and intangibles can be held in low tax jurisdictions to minimise the tax burden further.

The two "pillars" of these reforms aim to address these concerns by ensuring that profits are taxed where generated, and at a minimum rate of tax. The full framework as agreed in July, can be read here but in brief:

1. Pillar One provides for market jurisdictions to be able to tax 20-30% of the profits over 10% of the very largest multinationals – those with a global turnover over €20bn – regardless of any physical presence in that jurisdiction. This represents a historic change to the global taxation system though the turnover requirements will, at least at first, greatly limit the number of multinationals that need to consider this Pillar. Moreover, extractive industries and regulated financial services are excluded from these Pillar One rules. Unilateral digital services taxes must be withdrawn as part of the agreement.

2. Pillar Two sets rules ensuring a global minimum tax on corporate profit of "at least" 15% for multinationals with revenue exceeding €750m, subject to a substance-based carve-out for lower tax jurisdictions where the multinational has staff and/or tangible assets.

Issues remaining to be determined include:

• the precise percentage of residual profit to be allocated to market jurisdictions under Pillar One, within the agreed 20% to 30% range.
• the exact global minimum tax rate (will it be 15%, or higher?) under Pillar Two, and the size of the substance-based carve out.
• how the "effective" tax rate will be determined; appropriate adjustments to accounting profits, deferred tax assets and domestic tax incentives are all particularly thorny issues.
• when and how unilateral digital services taxes must be withdrawn. In particular, whether the EU will withdraw its proposal for a digital levy. Whilst that is currently on hold, it had a muchbroader remit (a turnover tax charged at 0.3 % on online sales of goods and services provided by companies operating in the EU with an annual turnover of €50m or more).
• whether it remains the aim to have Pillar One and Pillar Two in effect in key jurisdictions in 2023, and whether the Pillar Two provisions will be mandatory or merely 'best practice' recommendations.

We will update you further as details emerge…