Background
In recent years, the international community has witnessed an exponential increase in cross-border economic activities and the proliferation of multinational corporations. However, the existing international tax framework has struggled to adapt to these developments, leading to concerns about base erosion and profit shifting. Multinational companies have exploited gaps and inconsistencies in tax regulations to artificially shift profits to low-tax jurisdictions, resulting in substantial revenue losses for many nations.
To address these challenges, the Organisation for Economic Co-operation and Development (OECD) launched the Base Erosion and Profit Shifting (BEPS) project in 2013. The objective of the BEPS project was to address the shortcomings of the international tax system by proposing comprehensive measures to prevent tax avoidance and ensure that profits are taxed where economic activities are carried out.
The Global Tax Deal
After years of intense negotiations and deliberations, representatives from 138 countries and jurisdictions have reached an agreement on a global tax deal that builds upon the foundation laid by the BEPS project. The agreement focuses on two key pillars:
Pilliar One: Allocation of Taxing Rights
Under Pillar One, the agreement seeks to redefine the allocation of taxing rights between countries, particularly for highly profitable multinational enterprises. This pillar introduces a novel approach, allowing market jurisdictions to tax a portion of profits generated by multinational corporations, even in the absence of a physical presence within their borders. This ensures that companies pay taxes in countries where they have a substantial consumer base, regardless of their physical operations.
Pillar Two: Global Minimum Taxation
Pillar Two introduces the concept of global minimum taxation to discourage profit shifting to jurisdictions with lower tax rates. The agreement establishes a minimum tax rate of at least 15% for multinational corporations, thereby preventing them from evading taxation by exploiting jurisdictions with significantly lower tax rates. This provision aims to create a level playing field for businesses and mitigate aggressive tax planning strategies.
Implementation and Impact
The historic agreement is poised to have far-reaching implications for global tax systems and international tax cooperation. The signatory countries and jurisdictions will now commence the process of implementing the agreed-upon measures into their domestic legislation. Implementation will necessitate legislative amendments, treaty modifications, and coordinated efforts among tax authorities.
The global tax deal is expected to generate substantial additional tax revenue for countries, particularly those with substantial consumer markets but limited taxing rights under the current system. The agreement is anticipated to foster tax certainty, reduce disputes, and promote a more stable and predictable international tax environment.
Moreover, the deal aspires to achieve a fairer distribution of taxing rights and curtail harmful tax competition among nations. By establishing a global minimum tax rate, it seeks to discourage profit shifting to low-tax jurisdictions and discourage the employment of aggressive tax planning practices by multinational corporations.
Conclusion
As countries embark on the implementation process, it is expected that the global tax deal will foster greater tax transparency, enhance revenue collection, and promote increased cooperation among tax authorities. Although challenges may arise during the implementation phase, the collective commitment demonstrated by the participating nations represents a significant stride toward achieving a more equitable and sustainable global tax regime. ward achieving a more equitable and sustainable global tax regime.
This article was written by Ms Jodie Arpa.
For more information or if you have any questions, please feel free to contact Dr Ian Gauci or Dr Cherise Abela Grech.