How much revenue will the “global tax deal” generate? More than initially expected, according to the Organization for Economic Cooperation and Development (OECD).
The OECD, which has been brokerinhttps://www.oecd.org/about/g worldwide negotiations on the international tax framework, recently announced an upward adjustment of revenue estimates, with a full report forthcoming.
Two Pillars
The global tax deal comprises two “pillars.” The first one applies to multinational enterprises (MNEs) with revenues exceeding €20 billion and with more than 10 percent profitability. It also allocates 25 percent of excessive profit to market jurisdictions where the MNE has quantitative nexus. Pillar Two serves as a 15 percent minimum “book tax” based on a qualifying company’s financial statements.
According to new OECD analysis shared in a webinar on January 18, 2023, Pillar One’s annual global tax revenue gains, based on 2021 data, are expected to be $13 billion to $36 billion. About $200 billion in profits are now expected to be allocated to market jurisdictions annually, up from a previous 2020 estimate of $125 billion. This will largely benefit low- and middle-income countries. Pillar Two’s annual revenue gains have been revised from $150 billion to $220 billion, accounting for 9 percent of global corporate income tax revenues.
More and Better Data
During the aforementioned webinar, David Bradbury, deputy director of the OECD Centre for Tax Policy and Administration, explained that the new estimates are based on “more recent and better data,” such as country-by-country reporting figures showing significantly increased coverage.
“And that increased country coverage means that the areas where we have to extrapolate and estimate data have been reduced because we have more hard data … as a result of more countries reporting,” said Bradbury. The country-by-country reporting data covered 82 percent of profits in the OECD’s latest analysis, compared with 63 percent in its 2020 estimate.
The OECD used five data matrices, each with their own specific purpose and combination of information sources. The matrices covered the areas of corporate profit,
turnover, assets, employees and payroll. A comprehensive economic impact analysis and accompanying methodology report will be made available “in the coming months,” according to an OECD press release.
Significant Progress
“The international community has made significant progress towards the implementation of these reforms, which are designed to make our international tax arrangements fairer and work better in a digitalized, globalized world economy,” OECD Secretary-General Mathias Cormann said. He elaborated further, stating:
This new economic impact analysis again underlines the importance of a swift, efficient, and widespread implementation of these reforms to ensure these significant potential revenue gains can be realized. Widespread implementation will also help stabilize the international tax system, enhance tax certainty, and avert the proliferation of unilateral digital services taxes and associated tax and trade disputes, which would be bad for the global economy and economies around the world.
If you have questions or concerns about the global tax deal and how it might immediately or eventually affect your tax situation, contact your CPA.
FURTHER READING:
Case study: The global tax deal
OECD offers final guidance for global minimum corporate tax
European Union to implement global corporate minimum tax
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