OECD Pillars: Full steam ahead
Dr Gottfried Breuninger
Partner, German Head of Tax
Jack L. Heinberg
Ka Sen Wong
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2023 is set to be a year of change for the global tax landscape. After many years of negotiation, development and consultation, implementation of the OECD’s Pillar One and Pillar Two reforms to international taxation is now well underway. The two-pillar reforms constitute the carefully negotiated response to concerns about base erosion and profit shifting in the context of an increasingly digitalised global economy.
Development of Pillar One (reallocation of taxing rights)
Broadly, Pillar One aims to reallocate a portion of taxing rights (Amount A) over the residual profits of certain large multinational enterprises (MNEs) in favour of market jurisdictions (that is, the jurisdictions in which consumers are located). The residual profits would otherwise typically be taxed only in the jurisdictions where the MNEs house their operations or their IP. Pillar One will also introduce a fixed return on baseline marketing and distribution activities (Amount B) by way of a new standardised methodology to simplify the relevant transfer pricing calculations. As part of the Pillar One package, it has also been agreed that all jurisdictions will dismantle any unilateral digital services taxes and other similar measures taxing digital profits.
Development of Pillar Two (global minimum tax rate)
Pillar Two (which is expected to affect a greater number of companies) seeks to impose a 15% effective minimum corporation tax rate on the profits of in-scope MNEs (broadly, MNEs with annual revenue exceeding EUR 750 million) on the income arising in each jurisdiction in which they operate. Pillar Two will ultimately be effected through a series of interlocking measures (together, the global anti-base erosion – or “GloBE” – rules), comprising an “income inclusion rule”, an “undertaxed payments rule” and a “subject-to-tax rule”.
2023: What’s still to come?
In this update, we reflect on certain key developments from 2022 and look ahead to what 2023 might have in store as these MNEs and their advisers prepare for a significant shift in the global tax architecture. On Pillar One, we consider recent publications relating to both Amount A and Amount B. In relation to Pillar Two, we consider the recent finalisation of the EU Council Directive (EU) 2022/2533 of 14 December 2022, progress on domestic implementation by individual jurisdictions, and development of the Qualifying Domestic Minimum Top-Up Tax (QMDTT) and other safe harbours.
Need to know more?
The Allen & Overy global tax team will continue to monitor developments and consider their ongoing significance for multinational structures going forward, as well as the implications for existing cross-border structures. Please do not hesitate to get in touch with your usual Allen & Overy contact to discuss these developments and their impact on your business.
Pillar Talk: Conversations on global minimum taxes in a digital world is Allen & Overy’s new series of webinars, podcasts and publications focusing on global tax changes resulting from the implementation of the OECD’s two-pillar proposals.