A total of 130 countries and jurisdictions, including the Cayman Islands, have joined a new two-pillar plan to reform international taxation rules and establish a global minimum corporate tax rate of at least 15%.
All but nine of the 139 members of the OECD Inclusive Framework on BEPS have joined the Statement establishing a new framework for international tax reform.
The Inclusive Framework members who have not yet joined are Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, Peru, Saint Vincent and the Grenadines and Sri Lanka.
But China, which offers tax incentives to key sectors, has endorsed the agreement.
The framework updates key elements of the international tax system which, according to the OECD, is no longer fit for purpose in a globalised and digitalised 21st century economy.
The new plan builds on the OECD’s long-negotiated two-pillar approach.
Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest multinational companies, including digital companies.
It would re-allocate some taxing rights over multinationals from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
Pillar One covers multinational corporations with global turnover of more than EUR20 billion and pre-tax profit margins above 10%. Between 20 and 30% of profit in excess of a 10% margin will be allocated to market jurisdictions using a revenue-based allocation key.
However, extractive industries and regulated financial services are excluded.
The OECD estimates it will reallocate taxing rights on more than US$100 billion of profit to market jurisdictions each year.
Pillar Two introduces a global minimum corporate tax rate of at least 15% that is estimated to generate around $150 billion in additional global tax revenues annually.
The mechanism allows a country to recoup tax revenues when a domestic company offshores its profits to a jurisdiction that has corporate tax rates below the minimum international standard.
The formal agreement follows an endorsement by the G7 group of nations last month at a meeting in Britain. The negotiations will continue at a meeting of the G20 leaders on 9-10 July in Venice, Italy.
The remaining elements of the framework, including the implementation plan for 2023, will be finalised in October.
British finance minister Rishi Sunak said, “The fact that 130 countries across the world, including all of the G20, are now on board, marks a further step in our mission to reform global tax.”
French Finance Minister Bruno Le Maire told a press conference, “I welcome this huge step. It’s the most important international tax deal reached in a century.”
The OECD said, “The two-pillar package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-COVID recovery.”
OECD Secretary-General Mathias Cormann said the package will not eliminate tax competition, but sets multilaterally agreed limitations on it.
“It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions. It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year,” Cormann said.