The Organisation for Economic Co-operation and Development (OECD) announced a total of 136 countries and jurisdictions agreed on Oct. 8, 2021, to a global corporate tax accord that includes a 15% minimum tax and is intended to stop the proliferation of unilateral digital service taxes enacted over the last several years, especially in the European Union. This is part of what is referred to as the Two-Pillar Solution.

Pillar One involves an allocation of “excess,” market-based profits and will apply to the 100 largest countries with revenues over EUR 20 billion. Pillar Two is the 15% minimum tax provision applying to entities exceeding EUR 750 million in revenue. The agreement includes all G20 countries, making up the largest economies, including the United States. The United States finally agreed on the Inclusive Framework after many years of discussion trying to address the Base Erosion/Profit Shifting issue.

Smaller Multinationals Outside the Proposed Corporate Tax Agreement

Pillar One only applies to the largest and most profitable companies. The measure is intended to impose tax on between 20% and 30% of the profits in end-market jurisdictions (i.e., where goods or services are used or consumed) to the extent profits exceed a 10% margin. However, this agreement is a guideline, and each country must pass its own domestic legislation to implement its terms.

The Pillar Two 15% minimum tax will not apply to smaller multinationals with less than EUR 750 million (USD 868 million) in revenue or less. This allows countries, such as Ireland, to retain its 12.5% tax rate for many companies with operations in the country. If your operations are less than these amounts, there are still global locations that can offer you tax incentives without running afoul of these new rules.

Digital Service Taxes

Pillar One is to include the removal and standstill of the digital service taxes implemented by a number of countries. However, each individual country that has enacted a digital service tax must repeal the provision. There is no specific timetable or procedure in the agreement as to how this is to occur, which is a concern for the United States. Also, developing countries will be able to benefit from an elective mechanism in certain cases to ensure the rules are not too onerous for low-capacity countries.

Impacts to Your Operations

Doeren Mayhew can help you wade through these new OECD proposals and FAQs. To discuss how these issues might impact your operations, contact our international tax advisors today.