Global tax pact gains 131st country, about 80 companies would see profit reallocations

By Doug Connolly, MNE Tax

The OECD Secretary-General reported July 5 that Peru has become the latest country to join the statement endorsing international tax reform, adding one more country to the 130 jurisdictions who signed onto the agreement on July 1. With Peru’s support, the number of holdouts among the 139 jurisdictions engaged in the negotiations decreases to eight.

Meanwhile, initial estimates conclude that about 80 multinational enterprises would qualify as in-scope for purposes of being subject to partial profit re-allocation under the terms of the agreement described in the statement.

The report issued by the OECD Secretary-General provides an update on several tax initiatives for G20 finance ministers and central bank governors in advance of their meeting July 9–10 in Venice, where discussions on details under the international tax agreement are expected to continue. The report also covers tax policy initiatives related to climate change and support for developing countries.

According to the report, the proposed global minimum tax of at least 15% endorsed by the 131 countries joining the statement would generate an estimated USD 150 billion in additional global tax revenues.

Under the proposed terms for reallocating taxing rights for a portion of the profits of the largest multinational enterprises, the report estimates about USD 100 billion in profits would be reallocated to market jurisdictions.

Such profit reallocation would apply initially only to multinational enterprises that have at least EUR 20 billion (USD 23.6 billion) in global revenues and at least 10% profitability. The agreement allows for the eventual reduction of the revenue threshold to EUR 10 billion. An exclusion applies for certain financial services and natural resources companies. 

Research by Nikkei estimates that 81 companies would meet the initial revenue and profitability thresholds. Nikkei’s list includes 35 US companies, 11 mainland Chinese and five Hong Kong–based companies, and six Japanese companies.

An EconPol Policy Brief authored by Michael Devereux and Martin Simmler of the Oxford University Centre for Business Taxation puts the number of affected companies at 78, with 37 of those being European companies. The policy brief further estimates that 45% of the reallocated profits would belong to tech companies.

Tech companies selling automated digital services and consumer-facing businesses were the original targets of international efforts to reallocate a portion of taxing rights to market jurisdictions. However, the agreement reached last week generally adopted the approach proposed by the US in April to apply the new rules to, roughly, the 100 largest multinational companies, regardless of sector.