Inrecent years, countries have been debating significant changes to internationaltax rules that apply to multinational companies. This week there was abreakthrough in discussions, and an outline for the new rules was released bythe Organisation for Economic Co-operation and Development (OECD).
Largecompanies would pay more taxes in countries where they have customers and a bitless in countries where their headquarters, employees, and operations are.Additionally, the agreement sets up the adoption of a global minimum tax of atleast 15 percent, which would increase taxes on companies with earnings inlow-tax jurisdictions.
Ofthe 139 countries engaged in the negotiations, 130 signed on to the newoutline. Holdouts include Ireland with its 12.5 percent corporate tax rate andEstonia which applies tax only on distributed profits of companies.
Theproposal follows a general outline that has been under discussion since 2019.There are two “pillars” of the reform: Pillar 1 is focused on changing wherelarge companies pay taxes; Pillar 2 includes the global minimum tax. Bothpillars include multiple elements.
Theoutline also mentions that companies “in the initial phase of theirinternational activity” could be exempt from the global minimum tax, but thathas not yet been agreed to.
BothPillar 1 and Pillar 2 represent major changes to international tax rules, andthe outline suggests that the changes should be put in place by 2023. Countrieswould have to write new laws, adopt new tax treaty language, and repeal somepolicies that conflict with the new rules.
Theoutline specifically states that digital services taxes and similar policieswill need to be removed as part of implementing Pillar 1.
Thisagreement represents a major blow to tax competition, and it is unsurprisingthat a country like Estonia (a champion of good tax policy) was unwilling tosign up to it. Policymakers across the globe should be careful in designingmeasures to implement this and be aware of the various new distortions theserules will create.