131 Jurisdictions Agree to Two-Pillar Framework on Global Minimum Tax and Reallocation of Taxing Rights

July 2021

BY

Monika LovingManaging Partner, International Tax Services National Practice Leader

Laurie DickerNational Transfer Pricing Technical Leader

Michael MasciangeloClient Services Executive, International Tax Services

The OECD announced July 1 that 130 jurisdictions – representing more than 90% of global GDP – have agreed to a two-pronged plan that would establish a new framework for international taxation, including a global minimum corporate tax of at least 15% and the reallocation of taxing rights on more than $100 billion of profits annually.

The OECD acknowledged that a small number of Inclusive Framework members have not yet joined the statement. That group includes Ireland and Hungary, which had been vocal about their objection to a global minimum rate that is higher than their corporate tax rate. Conversely, some countries that had expressed reservations regarding the plan, including Argentina and China, have signed on to the framework.

In a statement issued July 5, the OECD announced that Peru, one of the initial holdouts, had joined the agreement.

The plan is detailed in a five-page statement that outlines the two prongs of the new framework – Pillar One on taxing rights and distribution of profits and Pillar Two on the global minimum tax.
 

Pillar One

Pillar One would apply to multinational enterprises (MNEs) with global turnover above EUR 20 billion and profitability above 10%. That threshold could be reduced to EUR 10 billion upon review seven years after the agreement enters into force.

Among the lingering questions that have surrounded the negotiations was whether any industry sectors would be excluded from the scope of Pillar One. That question has now been answered, with the announcement that companies in the regulated financial services industry and the extractive sector will not be subject to Pillar One.

The statement explains that a new special-purpose nexus rule would be introduced that would permit the allocation of a share of the residual profit -- Amount A – to market jurisdictions where an in-scope MNE derives at least EUR 1 million in revenue. In the case of smaller jurisdictions with GDP lower than EUR 40 billion, the nexus threshold would be EUR 250,000.

In terms of how much residual profit would be reallocated under the plan, the statement provides that between 20-30% of an in-scope MNE’s residual profit (defined as profit in excess of 10% of revenue) would be allocated to market jurisdictions that meet the nexus test. This seems to be a concession to countries that sought the reallocation of  a higher portion of residual profits, given that the statement by the G-7 finance ministers issued June 5, 2021 had originally called for the reallocation of at least 20%.

The signatories to the Inclusive Framework statement commit to provide the necessary coordination between the new rules and the removal of all digital service taxes.
 

Pillar Two

The global minimum tax rules would apply to MNEs that meet the EUR 750 million threshold as determined under the country-by-country reporting rules. The statement provides a carve-out for government entities, international organizations, nonprofits, pension funds and investment funds that are ultimate parent entities an MNE group, which will not be subject to these rules.

The agreed-upon minimum tax rate is at least 15%, with an exclusion on income equal to at least 5% (or 7.5% during a five-year transition period) of the carrying value of tangible assets and payroll. International shipping income, as defined in the OECD Model Tax Treaty, would also be excluded.

In an apparent concession to the US, the statement addresses the interplay of the global minimum tax rules and the US’s global intangible low-taxed income (GILTI) provisions, and provides that “consideration will be given to the conditions under which the US GILTI regime will co-exist” with the global minimum tax rules.
 

Time Frame

The OECD has set an ambitious time frame for conclusion of the negotiations, with an October 2021 deadline to finalize any remaining technical work (and presumably an announcement after the G-20 leaders’ meeting scheduled for October 30-31), and a plan for effective implementation in 2023.