Taxation of the Digitalised Economy - Proposals of the OECD
On 1 July 2021, the OECD's Inclusive Framework published the benchmarks for the future taxation of large, internationally active companies. The benchmarks provide for a shift of taxation rights to market states as well as a global minimum tax rate of at least 15 %.
On 1 July 2021, the OECD's Inclusive Framework published the benchmarks for the future taxation of large, internationally active companies. The benchmarks foresee a partial shift of taxation rights of the residence states to market states as well as a global minimum tax rate of at least 15 per cent.
All members of the OECD/G20 Inclusive Framework on BEPS have endorsed this outcome to address the tax challenges arising from the digitalisation of the economy as of 1 July 2021. A multilateral agreement should prevent a potential multitude of national solutions and thus create legal certainty. Numerous states, especially large ones, had announced national go-it-alone approaches in the event that an OECD solution failed.
Originally, the OECD project was launched in order to be able to better record for tax purposes internationally active digital companies without a physical market presence. In the course of the negotiations, however, the scope was expanded to include a general minimum taxation of large internationally active companies.
The Liechtenstein government has commented on the statement published by the OECD in a press release. In summary, it can be said that Liechtenstein does not reject the emerging global consensus, just like Switzerland, Luxembourg and Singapore, among others, but points out that a global solution must not interfere with the sovereignty of individual states and that the interests of small, innovative countries must be adequately considered in the final design of the rules. In addition, the new rules should be applied uniformly by the member countries and lead to a repeal of unilateral measures. The OECD's proposed solutions are based on two pillars.
Pillar 1 (Pillar One):
This model defines in which states the profits of a multinational company can be taxed and thus includes the expansion and redistribution of taxation rights between residence and market states (new starting points for corporate taxation and changes to the profit allocation mechanism between the states). Group profits are now also to be taxed where they are generated without a physical market presence (traditional permanent establishment). In concrete terms, this means that multinational enterprises (MNEs) with an annual turnover of more than 20 billion € and a profit margin of more than 10 % will in future have to pay tax on part of their profits in the market state. As part of the benchmarks, a review mechanism of this turnover threshold was also adopted on 1 July 2021. This provides that seven years after the agreement enters into force, the turnover threshold can drop to 10 billion euros under certain conditions.
According to the benchmarks, the commodities industry and regulated financial service providers are excluded.
Pillar 2 (Pillar Two):
Pillar Two sets global minimum taxation rules for corporate profits (Global Anti Base Erosion, GloBE). The aim of these rules is, among other things, to prevent profit shifting to low-tax countries. In doing so, a global effective minimum taxation is to ensure that every company makes a fair tax contribution, regardless of its registered office or permanent establishments.
Two measures are defined in this context. Firstly, an extension of the national regulations on additional taxation ("Income Inclusion Rule") and secondly, the limitation of the deduction of business expenses if an effective minimum taxation level is fallen short of ("Undertaxed Payments Rule"). This means that if a profit is not sufficiently taxed abroad, source states (i.e. the countries in which income is generated) may levy the difference between the low tax rate and the minimum tax rate. Other measures that are additionally applied in Pillar 2 are aimed at negating existing treaty advantages (e. g. "switchover rule" or "subject to tax rule").
The minimum tax rate used for the purposes of the Income Inclusion Rule and the Undertaxed Payments Rule must be at least 15 %.
The GloBE rules will apply to multinationals that meet the €750 million threshold as defined under BEPS Action 13. Countries are free to apply the Income Inclusion Rule to multinationals headquartered in their country even if they do not meet the threshold.
In addition, the GloBE rules provide for a formulaic substance exception that excludes an amount of income that is at least 5 % (at least 7.5 % in a transition period of 5 years) of the book value of tangible assets and payroll.