- OECD/G20 Inclusive Framework have agreed on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy.
- Ireland who did not sign the interim agreement in July, have now joined 136 countries and jurisdictions.
After several years of work the OECD/G20 Inclusive Framework have agreed on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. This programme of work will ensure that large multinational entities are subject to a minimum rate of tax and will reallocate profits.
Chartered Accountants Australia and New Zealand has supported the OECD work to prevent a ‘race to the bottom’ on corporate tax rates. Our advocacy has focused on ensuring New Zealand’s largest businesses - which are small on a global scale – were not impacted by disproportionate compliance costs.
In addition to New Zealand consulted on the implementation of a unilateral digital services tax. At the time our energy was better focused on developing our strategy for the OECD discussions. Other nations had already identified the potential for double taxation, breaching world trade organisation rules and the risk of retaliation from other jurisdictions. As a small exporting nation, these were all concerns.
Ireland raised some of the most vocal concerns about the pillar one and two proposals and had not signed the interim agreement earlier this year. As a small nation with a low corporate tax rate, much of their economy centers on attracting large businesses and they opposed requiring “at lease” a 15% minimum tax rate. However, following revisions Ireland have now joined the 136 countries and jurisdictions to agree to the implementation plan.
So, what has been agreed?
Pillar one “amount A” reallocates taxing rights in favour of market countries. Multinational entities with a global turnover above 20 billion Euros and before tax profitability of at least 10%. These businesses will reallocate 25% of their residual profit above the 10% level. This 20 billion Euro threshold is expected to be reviewed in 2030 and reduced to 10 billion Euros. It is expected the Agreement will be way of a multilateral convention developed and opened for signatures in 2022. Amount A will come into effect in 2023.
The work is not completely done yet – work on simplifying and streamlining “amount B” is scheduled to be completed in 2022.
Importantly – there is a prohibition on unilateral digital services taxes from 8 October 2021. Any consideration of a unilateral New Zealand digital services tax is now unlikely to proceed.
Pillar two introduces the 15% minimum tax rate and will come into effect from 2023. The risk is, as is often the case with international policy, that countries will not be required to adopt Pillar Two rules, but if they choose to, implementation must be in a manner consistent with the model rules and inclusive framework guidance.
Read the OECD statement
Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the EconomyRead statement
Read our earlier update
Ireland’s Apple Tax case – shining a light on OECD developmentsRead more