Last week a historic event for the international tax community took place, as nearly 140 countries signed up for the OECD's (Organisation for Economic Co-operation and Development) global corporate tax reform plan. The plan seeks to address the tax challenges implicated by an increasingly digital economy and suggests sweeping changes to how multinational companies are taxed, potentially increasing overall effective tax rates and tax filing obligations for worldwide income starting in 2023.
The OECD plan is an attempt, via the global tax system, to reconcile the ways in which globalization and digitalization have changed the world economy. It would grant taxing authority to countries from which nonresident companies derive earnings through online retailing, web advertising, and other digital activities, even if the companies lack a physical footprint in such countries. These rules would apply to companies with an annual global turnover exceeding EUR 20 billion and a profitability margin exceeding 10%.
Among its most significant provisions, the plan includes a 15% minimum corporate tax rate provision designed to deter companies from diverting profits to low-tax countries. This provision would apply to companies with more than EUR 750 million in annual revenue and a global effective tax rate of less than 15%. A top-up provision would apply to relevant companies to increase the tax paid in their home countries to reach the 15% minimum corporate rate.
So far, 136 countries, which represent 90% of the global economy, are cooperating with the plan, which is expected to bring $150 billion annually for participating governments through the implementation of a minimum tax rate. However, in the United States, the plan faces significant opposition from Republicans. If the OECD plan is presented for approval as a multilateral tax treaty, it would require the advice and consent of two-thirds of the Senate. In recent testimony before the Senate, Treasury Secretary Yellen indicated that the administration is considering alternative means of implementing the OECD plan. Given that the United States is home to many of the largest multinational companies, a rejection by Congress would cast uncertainty over the entire OECD project.
How Venable Can Help
If implemented, the OECD's proposed international tax plan could significantly increase tax costs for multinational businesses. Venable's international tax team can help clients identify how these rules may impact their global tax profile and provide strategic tax planning solutions.