In October, 136 countries, representing 90% of global economic output, agreed to reform the international corporate tax system and impose a 15% tax rate on the largest multinational enterprises from 2023.
The minimum tax is targeting corporations that generate profits in low-tax and zero-tax jurisdictions, including the Cayman Islands.
The landmark deal will also reallocate more than US$125 billion of profits from about 100 of the world’s largest and most profitable corporations to countries worldwide, to better align where these companies operate and generate profits with where they pay tax.
The OECD believes countries will collect around US$150 billion in new revenues annually as a result of the reform.
Years of negotiations among members of the OECD/G20 Inclusive Framework on BEPS will ultimately end by mid-2022 by when the last details are set to be agreed, according to the OECD.
These will be formulated in a multilateral instrument to implement the rules in bilateral treaties and take effect in 2023.
G20 leaders approved the two-pillar plan in November.
Re-allocating taxing rights
Pillar One will re-allocate some taxing rights over the largest and most profitable corporations from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
This aims to achieve a fairer distribution of profits and taxing rights over tech companies that can effectively sidestep traditional tax rules, based on physical presence, by delivering their products and services digitally.
Under the agreement, multinational enterprises with global sales of more than EUR20 billion and a profitability higher than 10%, will see a quarter of their profit above a 10%-threshold taxed by market jurisdictions, rather than countries where they were traditionally tax-resident.
While the new rules only apply to the approximately 100 most profitable companies, expanding the scope to more companies would have increased the amount of complexity but not necessarily the amount of re-allocated profits, the OECD said.
Minimum global corporation tax rate
Pillar Two introduces a global minimum corporate tax rate set at 15%.
This new minimum tax rate will apply to companies with gross revenues of more than EUR750 million in two of four successive financial years.
In practice, the global minimum tax rate applies to overseas profits. Governments are still able to set local corporate tax rates but if a company’s subsidiaries pay a lower tax rate than 15% in a specific country, the group’s home government can “top-up” the taxes that are due to the minimum rate.
There are, however, carve-outs for real, substantial activities.
The aim that companies will pay a minimum effective tax rate of 15% on their profits booked in low-tax and zero-tax jurisdictions is expected to generate almost all of the US$150 billion expected additional annual global tax revenues under both pillars.
Impact on Cayman ‘manageable’
Financial Services Minister André Ebanks described the impact of the tax reform as “manageable” for the Cayman Islands.
Although the measures are aimed at zero-tax and low-tax jurisdictions, including Cayman, Ebanks said they will not pose a significant problem.
He said Cayman wants to be a partner in international initiatives and has long maintained that taxes should be paid where they are owed.
The minister said the tax reform proposals focus on the activities of multinationals, to which Cayman has minimal exposure.
Cayman also does not have any double-taxation treaties, which are the subject of many tax issues addressed by the reform plans.
Investment funds were equally unaffected by a minimum global corporate tax rate, because their tax neutrality is internationally recognised, Ebanks said.
He added, the Pillar One and Two proposal will also not require Cayman to alter its indirect consumption-based tax model in any way.
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