Out of the 140 countries negotiating major international tax reform at the OECD, 136 of them agreed, on Friday 8 October, to the technical parameters for detailing the interim agreement on international tax reform reached in July (see EUROPE 12753/1).
“With Estonia, Hungary and Ireland having joined the agreement, it is now supported by all OECD and G20 countries. Four countries - Kenya, Nigeria, Pakistan and Sri Lanka - have not yet joined”, the OECD said in a statement.
The agreement, based on two pillars - reallocation of taxing rights (Pillar I) and global minimum corporate tax rate (Pillar II) - will be presented to the G20 Finance meeting in Washington on 13 October and then to the G20 summit in Rome at the end of the month.
According to the OECD, about $150 billion in new revenues will be generated annually. The first pillar of the reform will reallocate some of the taxing rights of multinationals from their home country to the markets where they operate and make profits, whether or not the firms have a physical presence there.
Multinationals, including those in the digital sector, but not in financial services, with global sales of more than €20 billion and a profitability above 10% will be covered by these new rules. 25% of profits above the 10% break-even point will be reallocated to market jurisdictions. The home countries of the multinationals advocated for a rate of 20%, while the host countries wanted 30%.
The second pillar introduces a global minimum corporate tax rate set at 15% - rather than ‘at least 15%’ - which will apply to companies with a turnover of more than €750 million.
The final negotiations on this pillar focused on the possibility of deducting from the tax base amounts based on “substance criteria”. An amount of income representing 5% of the carrying value of tangible assets and payroll of the companies concerned will be excluded. During a ten-year transition period, the amount of excluded income will be 8% of the net value of tangible assets and 10% of the payroll.
A de minimis exclusion is also provided for jurisdictions where a large enterprise has a turnover of less than €10 million and profits of less than €1 million.
“This is a major victory for effective and balanced multilateralism”, OECD Secretary-General Mathias Cormann said in a statement. He added: “It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy”.
This agreement will make it possible to “tax intangible activities, those that will create the most value in the years to come”, said the French Finance Minister, who is at the forefront of this undertaking. He said he hoped that the agreement would be translated into a “legal act” in the European Union under the French Presidency of the EU Council, with a view to application from 2023.
“Asking big companies to pay the right amount of tax is not only a question of public finances, it is above all a question of basic fairness”, said the European Commission President, Ursula von der Leyen. Commission Executive Vice-President Valdis Dombrovskis promised that “once the agreement is approved by the G20, the Commission will act swiftly to put the new provisions into practice in the EU”.
On the other hand, several NGOs have expressed their indignation. For Oxfam, this agreement is “shameful” because it was written by the pen of low-tax countries such as Ireland and, on Pillar II, it contains excessive exceptions and a transition period. For the Tax Justice Network, only 100 multinationals will be covered by Pillar I, and under Pillar II, developed countries will continue to receive most of the tax, leaving low-income countries to fend for themselves.
The inauguration of the Biden administration in early 2021 was a major turning point in the negotiations on this international tax reform.
See the detailed agreement: https://bit.ly/3akxIL9
All EU states on board
Earlier in the day, Hungary officially ended its reservations following similar announcements by Ireland and Estonia on Thursday.
Hungarian Finance Minister Mihály Varga had indicated that his country “could join wholeheartedly the agreement in the making” pointing to a “ breakthrough” in the negotiations, according to Reuters. According to him, a “targeted solution” has been found for the collection of the minimum tax.
On Thursday, after a meeting of the Irish government, Irish Finance Minister Paschal Donohoe said that Ireland had agreed to raise its tax rate on large companies from 12.5% to 15%, having been assured that the minimum tax would be set at 15% rather than ‘at least 15%’ as stipulated in the July interim agreement negotiated at the OECD. According to Mr Donohoe, this “sensible and pragmatic” decision had been made “in the interests of our country”.
On the same day, Estonia also did an about-face. “The government has negotiated that the minimum tax will make no difference to most Estonian companies and will only affect the subsidiaries of large multinationals”, Prime Minister Kaja Kallas had justified in a statement. (Original version in French by Mathieu Bion)