The tax landscape requires simple, collaborative common rules that can be administered digitally – and the world is heading in the right direction
The landmark agreement adopted in October 2021 by 137 countries and jurisdictions of the OECD/G20 Inclusive Framework on BEPS (Base Erosion and Profit Shifting) is the culmination of over a decade of work to fight against aggressive tax avoidance by multinational enterprises. Based on a two-pillar solution, one modifying the allocation of taxing rights between states and the other introducing a minimum tax rate on corporate profits, the Two Pillar agreement is the result of several years of negotiations towards better regulation of international taxation. The G7 has been instrumental in achieving this historic agreement. Its continued leadership remains integral to the implementation phase of the deal, as well as for other emerging priorities in the tax space.
Two-pillar tax reform
Since the deal on 8 October 2021, significant progress has been made to implement the landmark agreement.
With regard to Pillar One, and to facilitate a rapid and consistent implementation, negotiations have been underway to develop a multilateral convention since the beginning of 2022. Technical working groups are actively engaging to agree on the outstanding details, to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises. Amount A of Pillar One, i.e. the residual profits to be allocated to market jurisdictions, has been distilled into building blocks, and public consultations are underway in stages, to allow the Inclusive Framework to continue to move forward at a rapid pace.
As regards Pillar Two, the model rules to implement the Pillar Two minimum tax – the Global Anti-Base Erosion (GloBE) rules – were agreed in December 2021, to provide governments with a precise template and the mechanism for implementation. The GloBE rules define the multinational enterprises in scope and provide for a coordinated system of taxation intended to ensure large MNE groups pay the agreed minimum level of tax on income arising in each of the jurisdictions in which they operate. The commentary to the GloBE rules was published in March and a public consultation event on Pillar Two was held in April 2022.
Implementation is also progressing at the level of individual jurisdictions. The European Union is close to adopting its directive, Canada announced earlier in April as part of its budget proposal that it would be implementing the minimum tax, and the United Kingdom, Switzerland and the United Arab Emirates have also taken important steps towards implementation. This swift implementation of Pillar Two is a welcome and ground-breaking change in the international tax regime.
Contributions to the G7 presidency
The reform of the international tax system has also had a significant impact on national tax administrations. At the request of the German G7 presidency, the secretariat of the Organisation for Economic Co-operation and Development prepared a report for the G7 finance ministers’ meeting in May 2022, addressing this impact and how to further strengthen international tax cooperation in light of the Two Pillar solution. The report provides recommendations to reinforce cooperation at the tax administration level in the context of increasingly common and internationally coordinated rules. The corporate tax landscape needs simple, collaborative common rules, which can be administered digitally. In this regard, the report also covers the new global tax transparency framework that the OECD is developing, designed to ensure the collection and exchange of information on transactions in crypto-assets.
The OECD also continues to support international dialogue on explicit and implicit carbon pricing. The German government has put the formation of an ‘ambitious, bold and cooperative’ climate club at the top of its G7 presidency agenda, to provide both a forum and a mechanism for accelerating international collective action on climate change. The OECD is preparing a roadmap paper, together with the International Monetary Fund, that describes the path to building the evidence and the tools needed for improving comparability of climate policies, with a view towards supporting international dialogue on advancing climate mitigation. This work is undertaken in conjunction with, and should complement, ongoing work at the OECD to develop an inclusive initiative on carbon mitigation.