Author: Ozge Kisacik
In recent years, many new business models have emerged and traditional business models have changed greatly, within the increasing digitalization in the economy. Along with said change, challenges arose for taxing the international business income of multinational companies. The Organization for Economic Co-Operation and Development (“OECD”) and the G20 have determined that current international tax rules still allow large multinational companies (“MNE”) to earn significant income in a country without paying a minimum level of corporate income tax in that or any other country. In this context, countries have started to work on amendments to the international tax rules applicable to MNEs.
As a result of long negotiations to update and reform international tax rules, in October 2021, 137 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) joined the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy (“the Statement”).[1] On 20 December 2021, OECD published the “Model Rules on Global Minimum Tax” (“Model Rules”) regarding the second step of the two-step approach approved under the OECD/G20 Base Erosion and Profit Shifting (BEPS). These Model Rules cover the Income Inclusion Rule (“IIR”) and the Undertaxed Payment Rule (“UTPR”); all these rules are collectively referred to as the Global Anti-Base Erosion Proposal Rules (“GloBE Rules”).
The new framework is comprised of Pillar 1 and Pillar 2 and both Pillars include multiple elements. Briefly, the Two-Pillar Solution will ensure that MNEs which meet the criteria detailed later in this article will be subject to a minimum tax rate of 15%, and will re-allocate profits of the largest and most profitable MNEs to countries worldwide. In other words, both Pillars basically allow the country where the ultimate parent company is located to directly tax the company on income that is generated in a foreign country to the extent that this foreign income was taxed at an effective tax rate lower than 15%. It will not only provide market countries with a larger share of the profits of global large companies, but also prevent harmful tax practices such as tax havens.
