As the start of the new financial year is approaching, the new OECD taxation regulations will come into effect. Therefore, today’s article delves into the background of the research behind the new regulations and their forecasts.
The OECD Guidelines establish benchmarks for ethical corporate practices encompassing various concerns including human rights, labor rights, and environmental protection. Additionally, they create a global framework supported by governments to address grievances, facilitating the resolution of conflicts between companies adhering to the guidelines and individuals or groups affected by unethical business practices.
The implementation of the Global Minimum Tax (GMT), also known as Pillar Two, marks a significant stride in international collaboration concerning the taxation of multinational enterprises (MNEs). Under this framework, MNEs generating revenues exceeding EUR 750 million will be subject to a minimum effective tax rate of 15% regardless of their operating locations. The GMT, a cornerstone of Pillar Two within the two-pillar solution, is introduced through the Global Anti-Base Erosion (GloBE) Rules. This pivotal agreement endeavors to address tax challenges arising from the globalization and digitalization of the economy. Progress towards implementing the GMT has been substantial, with approximately 55 jurisdictions already taking steps toward its adoption, and the rules are set to be enforced in 2024.
Methodology behind determining the new rules:
A recent OECD analysis delved into the impact of the Global Minimum Tax (GMT) on the taxation of multinational enterprises (MNEs), leveraging new data on MNE activity worldwide and refined estimates of globally low-taxed profits. This analysis builds upon previous OECD research in several ways:
- Enhanced Data Coverage: Utilizing data spanning the years 2017-2020, with improved insight into the global profit distribution and activities of large MNEs (those with revenues surpassing EUR 750 million).
- Alignment with GloBE Rules
- Improved Methodology for GloBE Income and ETR: Refining the calculation of GloBE Income and the resulting effective tax rate (GloBE ETR) by adjusting for temporary book and tax differences following the GloBE Rules.
- Enhanced Estimation of Low-Taxed Profit: Employing a novel methodology to develop more comprehensive estimates of globally low-taxed profit, revealing significant low-taxed profit in high-tax jurisdictions.
- Updated Assumptions on GMT Implementation: Introducing revised assumptions regarding the GMT’s implementation, considering governments’ incentives to introduce Qualified Domestic Minimum Top-Up Taxes (QDMTTs) and ongoing developments in GMT implementation efforts.
Results of the research and forecasts:
Under the Global Minimum Tax (GMT), the projected decline in shifted profit is anticipated to be around fifty percent, largely due to significantly diminished incentives for profit shifting. However, these effects may take time to manifest. This reduction in profit shifting implies a greater concentration of profit in locations where multinational enterprises (MNEs) conduct substantial economic activities, potentially benefiting developing countries, which research suggests are more susceptible to profit-shifting practices. Investment hubs are forecasted to experience a roughly thirty percent reduction in their tax base due to decreased profit shifting, leading to revenue gains for other jurisdictions.
The application of top-up taxes and the curbed practice of profit shifting are expected to result in an increase in global corporate income tax (CIT) revenues. The GMT is projected to generate additional CIT revenues ranging between EUR 140-175 billion annually, equivalent to 6.5% to 8.1% of global CIT revenues, with approximately one-third of these gains attributed to reduced profit shifting.
For this initiative, the Netherlands led the way in Europe in the spring of 2023, being the first country in Europe to present a bill introducing Pillar Two to the parliament. The Netherlands considers this an important measure to counter tax avoidance worldwide. 2024 marks the first financial year when those regulations will be effective.
References
Government of the Netherlands . (2023, May 31). Netherlands leads the way in Europe with bill for the Minimum Tax Rate Act 2024 (implementing ‘Pillar Two’). Retrieved from Government of the Netherlands : https://www.government.nl/latest/news/2023/05/31/netherlands-leads-the-way-in-europe-with-bill-for-the-minimum-tax-rate-act-2024-implementing-pillar-two
OECD. (2024). Economic Impact Assessment of the Global Minimun Tax: Summary . OECD .
OECD Watch. (2024). The OECD Guidelines. Retrieved from OECD Watch : https://www.oecdwatch.org/oecd-ncps/the-oecd-guidelines-for-mnes/
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