A historic reform of the international tax system
Tackling harmful tax practices has been the goal of the OECD since the 1990s, and now it is helping to deliver a multilateral Two-Pillar Solution that’s built on cooperation and compromise
On 8 October 2021, 136 of 140 members of the Organisation for Economic Co-operation and Development/G20 Inclusive Framework on Base Erosion and Profit Shifting – representing more than 90% of global gross domestic product – agreed on the Two-Pillar Solution to address tax challenges arising from digitalisation. This reform brings the most significant changes to the international tax rules in over a century and will reallocate more than $125 billion of profits from around 100 of the world’s largest and most profitable multinational enterprises to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits. The Two-Pillar Solution also includes a global minimum corporate tax that will generate around $150 billion in additional tax revenue annually. The implementation phase is ambitious and already on track, as is work on other emerging priorities for the G20 related to tax.
Two-pillar tax reform
The OECD has been leading international efforts since the 1990s – and particularly since 2009 with the support of the G20 – to enable countries to prevent tax evasion and corporate tax avoidance by tackling harmful tax practices and improving tax transparency (including ending bank secrecy for tax purposes), and by associating as many countries as possible, far beyond the OECD membership, to ensure a global level playing field.
Since 2013, the 15-action BEPS Project has made significant progress in bringing more coherence, substance and transparency to the international tax system. Within the OECD/G20 Inclusive Framework on BEPS, 140 countries and jurisdictions have been working together since 2016 to implement BEPS measures. Tax avoidance practices from MNEs cost countries $100–240 billion in lost revenue annually.
A key part of the BEPS Project has been to address the tax challenges arising from the digitalisation of the economy, and this has become increasingly important on the international agenda. The Two-Pillar Solution is truly a historic milestone. Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries regarding the largest MNEs, which can be considered the winners of globalisation. It reallocates 25% of profits above 10% to the market countries. Pillar Two seeks to put a floor on tax competition on corporate income tax through a 15% global minimum corporate tax that countries can use to protect their tax bases. Pillar Two does not eliminate tax competition, but does set multilaterally agreed limitations on it. The standstill and removal of digital services taxes and other relevant similar measures will bring certainty and ease trade tensions.
Implementing the package
Following this major achievement, it will be crucial to move rapidly into implementation and ensure that the package comes into force in a coordinated manner. The Detailed Implementation Plan, also agreed on 8 October, provides for a concrete and ambitious timeline. Different instruments need to be designed and adopted in the coming months. Notably, in 2022, model rules for domestic legislation will be developed on Pillar One and the new taxing rights will be implemented through a multilateral convention to be signed in 2022, with a view to come into effect in 2023.
Developing countries, as members of the Inclusive Framework on an equal footing, have played an active role in the negotiations and the Two-Pillar Solution contains several features to ensure that the concerns of low-capacity countries are addressed. The OECD will ensure the rules can be effectively and efficiently administered, also offering comprehensive capacity building support to countries that
need it.
Emerging tax priorities
With the support of the 2021 Italian G20 presidency, this is the first time that tax and the environment are together on the G20 agenda. A High Level Symposium on Tax Policy and Climate Change was held in July 2021 with finance ministers and it is now important to take the multilateral dialogue forward. We now need to adopt a coordinated approach, to reflect and measure explicit and implicit carbon pricing to analyse the impact of the different options.
Following the presentation to the G20 of the OECD’s ‘Taxing Virtual Currencies’ report in October 2020, a reporting framework for crypto-assets is being designed, and should be one of the main deliverables under Indonesia’s G20 presidency in 2022. Parallel work at the OECD also continues on the tax policy implications of crypto-assets.
The scope of the work on international tax and the interest it has attracted both at the highest political levels and with the public demonstrate that the G20’s efforts to shape the international tax architecture over the past decade have had real impacts. Taxation has become a global issue, and is interwoven with the most pressing concerns facing the world – climate change, the COVID-19 pandemic and meeting the Sustainable Development Goals. These issues all demand multilateral solutions, and the success of Inclusive Framework members in agreeing on the Two-Pillar Solution shows what can be achieved through a spirit of cooperation and compromise. G20 leadership has been instrumental in this success, and its unity and resolve will be counted on as we move forward.
