International Tax Agreement Could Significantly Impact the Taxation of Multinational Enterprises
Once implemented, a new international tax agreement announced by the Organization for Economic Co-Operation and Development (OECD)/G20 could significantly change the taxation dynamics for multinational enterprises (MNEs). Pillar One of the agreement calls for the allocation of taxing rights of 25% of residual profits generated by most profitable MNEs to nations where services or goods are consumed.
Pillar Two of the agreement calls for the imposition of a 15% global minimum tax on MNEs that have a yearly consolidated group revenue of not less than 750 million euros. Over 130 nations, including the U.S., signed this two-pillar global tax agreement after years of negotiation.
Pillar One requires subjection of 25% of the most profitable MNEs’ residual profit to taxation by countries where the use or consumption of goods or services takes place. This unique rule applies to MNEs whose global revenues exceed 20 billion euros (turnover threshold) and have profitability of over 10%.
These MNEs must also rake in a minimum revenue of at least 1 million euros from a specific market jurisdiction (nexus threshold). For markets whose gross domestic product falls below 40 billion euros, the nexus threshold will adjust to 250,000 euros. After seven years, the turnover threshold could drop to 10 billion euros.
Pillar Two of the agreement will impose a 15% global minimum tax on MNEs whose consolidated group revenue hits or exceeds 750 million euros per year. This pillar will include an Income Inclusion Rule that will subject a parent entity to tax based on the lower-taxed income of a subsidiary. It will also consist of an Undertaxed Payment Rule that will deny deductions or call for equivalent adjustments any time a subsidiary’s low-taxed revenue isn’t subjected to taxation under the Income Inclusion Rule.
Pillar Two seeks to create an avenue for global tax competition. It’s projected to generate a new annual international tax revenue of about $150 billion. Domestic implementation rules for the Undertaxed Payment Rule and Income Inclusion Rule are anticipated in late November 2021.
A tax attorney in Las Vegas can enlighten an MNE owner on the tax implication of the new global tax agreement on his or her business. The attorney can guide the MNE owner through the process of developing a strategy to help the business remain compliant with the new tax rules while minimizing costs, administrative hassles, and risks of business tax audits.