It has become nearly impossible to draw clear boundaries between the traditional economy and the digital economy. We therefore need rules that work for all business models, regardless of how digital they are. This is especially true for the tax rules we use to ensure that large companies pay their fair share of the taxes that are needed to finance government functions.
The increasing digitalisation of the economy, and the altered processes of value creation this brings, pose without a doubt one of the greatest challenges for international principles of taxation: intangible assets and cross-border services enable companies to do business in countries where they have no physical presence and thus to earn profits that – under current tax rules – are not taxable in those countries.
Digitalisation also makes it easier to engage in aggressive tax planning, for example by shifting profits from high-tax jurisdictions to low-tax jurisdictions. This not only undermines acceptance of the applicable rules, but also encourages an excessive and disastrous “race to the bottom” in which jurisdictions try to outbid each other with lower and lower tax rates.
In order to find a solution to the tax challenges posed by the digitalisation of the economy, the OECD launched a two-pillar project at the behest of the G20. A total of 141 jurisdictions are working together on this crucial project on an equal footing.
Under the first pillar, participating jurisdictions develop a blueprint for reallocating international taxing rights. Through the creation of new nexus rules, taxing rights will be reallocated from the country of residence to countries where companies make profits without being physically present, known as “market jurisdictions”.
In addition to reallocating taxing rights, Pillar 1 also has the overriding objective of stabilising the international system of tax law. This joint approach will create a collective system that will make it unnecessary to introduce measures (in particular national digital taxes) at the national level. This will prevent international double taxation and create legal certainty for all stakeholders.
Pillar 2 consists of a proposal to establish a global minimum effective tax. This proposal was introduced jointly by France and Germany.
The basic principle behind a global minimum effective tax is relatively simple: all countries agree on a minimum level of tax that applies worldwide. The amount of tax will be based on the difference between the actual tax due in a country and the agreed minimum tax rate. Overall, this approach will lead to greater tax fairness at the international level. In addition, a global minimum effective tax will effectively counteract the tax problems caused by digitalisation and by possibilities for transferring intangibles.
Our FAQs on the global minimum tax provide detailed information on both pillars.
G20 finance ministers and G20 heads of state and government have repeatedly emphasised the need to reach an international agreement in response to the tax challenges posed by the digital economy. They welcomed the outcomes that were achieved.
“The agreement to establish a global minimum tax is a monumental step towards greater tax fairness. We negotiated intensely to achieve this positive outcome for Germany. This is very good news for all taxpayers. We have fulfilled the promise we made to our citizens: In the future, major corporations will pay their fair share to help finance public goods. We will now push hard to ensure that these results are swiftly put into practice in Europe.” Former Federal Minister of Finance Olaf Scholz
At the European level as well, EU member states welcome the significant progress that has been achieved at the international level. They, too, have reaffirmed their commitment to implement the solution that has been found as quickly as possible.
“We have taken another important step towards greater tax fairness. The OECD countries have agreed on the key parameters for a global minimum tax. Additional countries have also signed up to the reforms, which sends a strong message of multilateralism. The endorsement of the EU member states is in particular a great success. Today’s agreement means that we have gained support, clarity and speed for this historic reform.” Former Federal Minister of Finance Olaf Scholz
The implementation roadmap sets out that both pillars will enter into force already in 2023. On 22 December 2021, the European Commission presented a draft directive for the implementation of the minimum effective tax within the EU. This will ensure an effective and uniform implementation within the EU. Pillar 1 will be implemented by means of a multilateral international treaty (known as the “Multilateral Instrument 2.0”), which will be drawn up by the OECD in the coming months.