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The Impetus for a Global Minimum Tax

Many countries, including the U.S., have enacted rules to discourage multinational companies from shifting profits, and thus, tax revenues, to low-tax countries. The rules can be complicated and often create a compliance burden, even for those who are operating in other countries without that motivation in mind.

A fundamental shift, however, is in the works. The aim is to eliminate the ability to capitalize on low-tax jurisdictions altogether by way of an agreed-upon global minimum tax, in addition to proposed changes to the global allocation of taxation rights. At the most recent meeting of the Group of Twenty (“G20”) of the world’s largest economies on July 9th and 10th, an agreement was made to support a global minimum tax of at least 15% on large corporations. 35 countries had a top rate of less than 15% in 2020. This comes as part of a broader agreement to overhaul international tax rules under a “two-pillar” approach. On October 12, 2020, The Organisation for Economic Co-operation and Development (“OECD”) released two reports, which it calls “blueprints,” detailing its proposed two-pillar approach. The blueprint for Pillar One deals with the allocation of taxing rights, which looks to allocate more taxing rights to where value is created through businesses’ participation in the user or market rather than based on physical presence; and Pillar Two’s aim is to ensure that international businesses are subject to a minimum tax rate.

The Base Erosion and Profit Shifting (“BEPS”) initiative originally emerged following the 2008 global financial crisis, when fairness of the international tax system was spotlighted and confidence in it diminished. The OECD/G20 Inclusive Framework on BEPS (“OECD/G20 Inclusive Framework”) was created to help establish fundamental changes to the international tax system and establish coherence, realign substance with taxation rights, and increase transparency in a format in which all members participate on equal footing. 132 of its 139 member countries have now agreed on the framework to reform international tax rules under the two-pillar approach. The plan is for the OECD/G20 Inclusive Framework to create a detailed implementation plan and finalize the remaining issues by October 2021.

Per the outline drafted, Pillar One would apply to companies with more than €20 billion in revenues and a profit margin above 10%. After a review period of seven years, the €20 billion threshold may fall to €10 billion. The Pillar Two rules regarding the minimum tax rate are meant to apply to companies with more than €750 million in revenues. The minimum tax rate may be effective as early as 2023.

The OECD targets putting an end to tax avoidance strategies that exploit gaps and mismatches between different countries' taxing systems. Those against the proposal argue that eliminating the tax benefits of structuring investments through these low-tax jurisdictions would directly impact business incentives to invest across borders. Currently, the proposal addresses only large companies, but as with anything in tax in the long-run, nothing is certain. It will be interesting to watch as developments unfold later this year.