That was quick! BEPS 2.0 Inclusive Framework announced seemingly overnight
In our previous newsletter, Will we be seeing a significant change in global tax? We discussed how the G7 had met and signed an agreement on global tax reform. As you may recall, the agreement was based on the Organisation for Economic Co-operation and Development’s (“OECD”) report to address tax challenges arising from digitalisation of the economy. The agreement set out two Pillars: Pillar One which addresses the allocation of taxing rights between jurisdictions and proposes new nexus and profit allocation rules; and Pillar Two which focusses on a global minimum tax. Yesterday, 1 July 2021, the OECD announced that 130 out of 139 countries in the Inclusive Framework have agreed to this bold new framework for international tax reform. This includes all of the G20. The Inclusive Framework was established in 2016 to ensure that all countries can fairly be part of the development of standards on base erosion and profit shifting issues.
Notably, Ireland, Hungary, and Cyprus are three of the nine members of the Inclusive Framework who did not agree to join. The framework will be finalised in October and will be implemented in 2023. In the announcement the OECD provided more insight into the reasoning behind the framework.
The intention of Pillar One is to ensure profits are distributed “fairly” and that taxing rights are properly distributed across relevant countries, in particular with respect to large multinationals. Large multinationals are currently defined as multinationals with global turnover above Eur20 billion and profitability above 10% (i.e., profit before tax/revenue) which is a higher threshold than expected (for example the Country-by-Country threshold is usually Eur750 million).
Pillar Two focuses on the introduction of a global minimum corporate tax rate of at least 15%.
Under Pillar One, taxing rights on more than USD 100 billion of profit are expected to be reallocated each year. Pillar Two is estimated to generate around USD 150 billion in additional global tax revenues annually. Further advantages are expected to arise from a fairer international tax system and clearer international tax legislation for taxpayers and tax administrations.
We expect the tax world to be all shook up for a while as it grapples with these big changes. Watch this space, and if you would like to discuss this topic and the potential impact on your business, please contact us.
How can we help?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.