On 8 October 2021, the OECD published the "Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy". The document sets out the key parameters for the future taxation of the digitalized economy on the basis of two pillars.
Pillar One (selection):
The purpose of Pillar One is to establish new determination and allocation rules for profits of companies that are predominantly active in the digital-intensive or consumption-oriented sector by means of a multilateral convention. With Pillar One, the market states are to be allocated a corresponding share of the residual profit for taxation (Amount A). In addition, simplified rules for third-comparison-compliant remuneration for local marketing and sales or routine activities are to be introduced (Amount B).
According to the new statement, Pillar One covers multinational enterprises (MNEs) with a worldwide turnover of more than EUR 20 billion and a profitability of more than 10% (profit before tax). If the implementation is successful after a review seven years after its entry into force, this amount is to be reduced to EUR 10 bn.
For MNEs covered by the new regulation, 25% of the residual profit is to be distributed among the market states according to a turnover key. This is understood as the share of profit (measured as far as possible on the basis of the annual financial statements (financial accounting)) that exceeds 10% of turnover. Only market states with a certain nexus are taken into account, which is a local turnover of EUR 1 million or EUR 250,000 (for smaller jurisdictions with a GDP of max. EUR 40 billion).
The distribution described is to be limited by a safe harbour for marketing and sales activities that has yet to be specified.
The multilateral convention should also commit its parties to repeal all special taxes on digital services (digital services taxes) and similar measures and not to introduce any new ones. As of 8 October 2021, no newly introduced digital services tax or similar measure shall be applied to any company. This shall apply until the earlier of: 31 December 2023 or entry into force of the Multilateral Convention. The modalities for the elimination of existing digital services taxes and similar measures shall be appropriately coordinated.
The multilateral convention for Amount A is expected to be ready for signature in mid-2022, with entry into force in 2023. For Amount B, further work is planned until the end of 2022.
Pillar Two(Selection):
Pillar Two deals with the introduction of a global minimum tax for internationally active companies. The following mechanisms should be used for this purpose:
- Global anti-Base Erosion Rules (GloBE), consisting of (i) Income Inclusion Rule (IIR; similar to CFC rules) and (ii) Undertaxed Payments Rule (UTPR; deduction limitation on certain payments to related parties abroad);
- Agreement-based Subject to Tax Rule (STTR; allowing supplementary withholding taxes on a DTA basis for developing countries, provided payments such as interest or royalties are taxed at a rate below 9% in the recipient state).
States are not obliged to introduce GloBE rules; however, if they are introduced, they must be in line with the agreed rules. Corresponding regulations of other states are to be accepted.
The GloBE rules apply to MNEs that exceed the EUR 750m country-by-country reporting threshold, subject to certain transitional relief and carve-outs. States are free to define lower thresholds for companies headquartered there.
The agreed minimum taxation for the GloBE rules is 15%, calculated on the respective financial statements (financial accounting) with certain agreed adjustments in line with Pillar Two tax policy objectives as well as mechanisms to deal with timing differences.
With regard to the US GILTI scheme, coordinated coexistence is envisaged.
Model regulations on GloBE and a regulation in the model agreement on STTR are to be developed by the end of November 2021. For the latter, an MLI (multilateral instrument) is to be developed by mid-2022. Finally, an implementation framework to facilitate the coordinated introduction of the GloBE rules is to be developed by the end of 2022 at the latest, and the development of a further multilateral convention is to be examined.
The OECD statement and additional documents are available here .
