130 countries and jurisdictions, representing more than 90% of global GDP, have agreed on 1st of July 2021 on a new two-pillar proposal to overhaul international tax regulations and ensure that multinational corporations pay their fair share of tax wherever they operate.
At a turning point for the global economy, the Organization for Economic Co-operation and Development (OECD) issued a statement committing each country to a plan to radically transform the global tax system.
The low-tax EU members Ireland, Estonia, and Hungary, as well as Peru, Barbados, Saint Vincent and the Grenadines, Sri Lanka, Nigeria, and Kenya, did not sign the agreement.
The two-pillar plan
The two-pillar package, the result of negotiations for much of the previous decade, aims to guarantee that big Multinational Enterprises (MNEs) pay tax where they operate and make profits, while also bringing much-needed clarity and stability to the international tax system.
Pillar One will provide a more equitable allocation of earnings and taxing rights across nations in relation to the major MNEs, particularly digital firms. It would re-allocate part of MNEs’ taxation rights from their home nations to markets where they conduct commercial operations and make profits, regardless of whether companies are physically present there.
Pillar Two aims to eliminate competition in corporate income tax by introducing a global minimum corporate tax rate of at least 15% that countries can use to protect their tax bases.
The OECD, which led the negotiations, said a worldwide minimum corporate tax of at least 15% could generate around $ 150 billion in additional tax revenues annually.
The proposed minimum tax rate of at least 15% would apply to companies with revenues above a 750 million euros (889 million US dollars) threshold. Only the shipping industry would be excluded.
The new regulations on where multinational corporations are taxed attempt to distribute the authority more fairly to tax their earnings across nations, since the rise of digital commerce has allowed major tech companies to record profits in low-tax jurisdictions regardless of where the money was generated.
MNEs with a worldwide revenue of more than 20 billion euros and a pre-tax profit margin of more than 10% would be considered in scope, with the turnover threshold potentially dropping to 10 billion euros after seven years following a review.
Extractive industries and regulated financial services will be excluded from the regulations on where multinationals are taxed.
According to a statement from nations that endorsed the deal, technical details must be agreed on by October 2021 in order for the new regulations to be implemented by 2023.
The implementation of 15% minimum CIT was decided after negotiations between OECD and US officials in order to deal with MNEs that operate across borders, irrespective of the physical presence in a country. The implementation aims to a more harmonized international tax system in respect to such MNEs and digital economy.
How could the new order affect CYPRUS?
If multinationals would be forced to pay a minimum of 15% tax in each country they operate in, they might start choosing jurisdictions that offer more incentives than a low (or zero) tax rate.
CYPRUS, having a great business infrastructure and different tax benefits, can attract even more businesses.