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6 April 2023

Global corporate tax reform is on the way

Under the auspices of the OECD, 138 countries have reached an agreement on a fair allocation of taxing rights and a global minimum effective tax rate of 15%. This is a genuine revolution in international tax law. The global minimum tax rate will now be implemented in national law.

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The two-pillar approach to international corporate taxation

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.

There is no doubt that the increasing digitalisation of the economy, and the altered processes of value creation this brings, pose 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, it also encourages an excessive and disastrous “race to the bottom” where jurisdictions try to outdo each other with lower and lower tax rates. This damages Germany as a business location, and it damages the companies that operate here.

In order to find a solution to these tax challenges, the OECD launched a two-pillar project at the behest of the G20.

Under Pillar 1, participating jurisdictions develop a blueprint for reallocating the international taxing rights that apply to the world’s largest and most profitable companies. 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 should make it unnecessary to introduce measures (in particular domestic digital taxes) at the national level. This will prevent international double taxation and create legal certainty for all stakeholders.

Pillar 1 will be implemented on the basis of a multilateral international treaty, which is currently being negotiated.

Pillar 2 consists of a proposal to establish a global minimum effective tax rate. This proposal was introduced jointly by France and Germany.

The basic principle behind a global minimum effective tax rate is relatively clear: all countries agree on a minimum level of tax that applies worldwide. If this level of tax is not achieved in a specific situation, then a “top-up” tax is levied. The amount of this top-up tax depends 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 rate will effectively counteract the tax challenges caused by digitalisation and the deliberate transfer of intangibles to low-tax jurisdictions.

Our FAQs on the global minimum tax rate provide detailed information on both pillars.

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The road to a global minimum tax rate

  • 1 July 2021:
    The OECD body which has been working on this issue, the Inclusive Framework on BEPS, achieved a broad international agreement on the key elements of the reform (see the OECD statement on the two-pillar project [pdf, 175KB] ). To date, 138 states and jurisdictions have joined the initiative.
  • 9–10 July 2021:
    The G20 finance ministers approved the basic approach at their meeting in Venice (see Communiqué [pdf, 701KB] ).
  • 8 October 2021:
    The Inclusive Framework on BEPS succeeded in clarifying the remaining open technical details and agreed on a roadmap for implementing the measures (see the OECD statement on the two-pillar project and the roadmap for implementation [pdf, 205KB] ).
  • 13 October 2021:
    The G20 finance ministers approved both the technical details and the roadmap for implementation during a subsequent meeting in Washington, D.C. (see Communiqué [pdf, 784KB] ).
    You can find a summary of the outcomes of the Washington meeting here.
  • 20 December 2021:
    The OECD Secretariat published internationally agreed model rules intended to act as a blueprint for the implementation of a global minimum effective tax rate in domestic law.
  • 14 March 2022:
    The model rules were supplemented by the publication of a model commentary to aid in interpreting the rules.
  • 15 December 2022:
    The European Union member states agreed on a common directive to ensure uniform implementation within the EU.
  • 31 December 2023:
    This directive must be implemented in national law by the end of 2023. The Finance Ministry has published a discussion draft of the act to implement the directive.