130 nations endorse global tax overhaul, nine nations hold out

By Doug Connolly, MNE Tax

Following virtual talks between 139 nations represented in the OECD’s “Inclusive Framework,” 130 nations signed onto a detailed statement on July 1 for adopting new international tax rules, including a global minimum tax of at least 15% and new rules for allocating taxing rights between nations.

The statement also sets out an ambitious timeline, including finalizing the technical work on the agreement by October and starting implementation in 2023.

“After years of intense work and negotiations,” OECD Secretary-General Mathias Cormann said, “this historic package will ensure that large multinational companies pay their fair share of tax everywhere.”

US Treasury Secretary Janet Yellen also praised the agreement, saying in a statement, “Today is an historic day for economic diplomacy. … Today’s agreement by 130 countries representing more than 90 percent of global GDP is a clear sign: the race to the bottom is one step closer to coming to an end.”

Only nine of the participating nations did not sign onto the agreement: Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, Peru, Saint Vincent and the Grenadines, and Sri Lanka.

In a statement following release of the agreement, Irish Finance Minister Paschal Donohoe said that while Ireland supports the agreement in broad terms, it has reservations about the global minimum effective tax rate of “at least 15%.” Accordingly, Ireland “is not in a position to join the consensus.”

Minimum tax

The statement sets out a global minimum corporate tax of “at least” 15%. The minimum tax rules would apply to multinational enterprises with global revenue of EUR 750 million (approximately USD 888 million) or more.

Under the agreement, global anti-base erosion (GloBE) rules would enable nations to impose “top-up tax” on a parent entity with respect to income incurred by a subsidiary in a low-tax jurisdiction (income inclusion rule) or to deny associated deductions (undertaxed payments rule).

A carve-out from the GloBE rules would “exclude an amount of income that is at least 5% (in the transition period of 5 years, at least 7.5%) of the carrying value of tangible assets and payroll.”

According to the statement, the signing nations intend for the global minimum tax to have “a limited impact on MNEs carrying out real economic activities with substance.” With that in mind, the agreement contemplates continued discussions on the “direct link between the global minimum effective tax rate and the carve-outs.”

The agreement states that implementing laws for the minimum tax should be adopted in 2022 for the tax to take effect in 2023.

Allocation of taxing rights

The agreement would allow for the re-allocation of a portion of taxing rights to market jurisdictions for multinational enterprises with global turnover above EUR 20 billion (USD 23.7 billion) and profitability above 10%. Following a successful implementation and a review occurring seven years after the agreement comes into force, the plan is to reduce the threshold to EUR 10 billion.

The agreement excludes from the scope “Extractives and Regulated Financial Services.”

For in-scope multinational enterprises, a “new special purpose nexus rule” would apply in a jurisdiction to the extent the entity derives at least EUR 1 million (USD 1.18 million) in revenue from the jurisdiction. This threshold is lowered to EUR 250,000 (USD 296,000) for smaller jurisdictions with GDP lower than EUR 40 billion (USD 47 billion).

The reallocation of an in-scope company’s profits to market jurisdictions would apply to “between 20-30% of residual profit defined as profit in excess of 10% of revenue.”

Under the agreement, the new allocation rules would be coordinated with “the removal of all Digital Service Taxes and other relevant similar measures on all companies.”