The OECD issued an announcement that 130 jurisdictions (including China, India and the USA) have agreed to join an international tax reform plan under the Inclusive Framework of Base Erosion and Profit Shifting led by the OECD and G20 (“Two-pillar Plan”) on July 1st, 2021.

The Two-pillar Plan aims to unify the international tax regime to some extent. The first pillar has re-specified the allocation principle of the taxation rights on big multinational enterprises. The second pillar aims to establish the lowest effective enterprise income tax rate to avoid the “race to the bottom” (which each jurisdiction used to expand the tax source) among each jurisdiction.

This tax alert aims to elaborate the content of Two-pillar Plan and share RSM’s observation and opinion on the impact to China mainland (excluding Hong Kong, Macau and Taiwan).

l.Key Content

Specific content of Two-pillar Plan

1. The first pillar: the allocation principle of the taxation rights on big multinational enterprises

The first pillar will allocate the taxation rights on big multinational enterprise groups (i.e. global consolidated annual revenue of more than EUR 20 billion) to the jurisdictions where they operate and their clients are located in (“Market Jurisdictions”) regardless of whether these big multinational enterprises have entities in these jurisdictions. For in-scope multinational enterprises, between 20-30% of residual profit defined as profit in excess of 10% of revenue will be allocated to Market Jurisdictions. Under the influence of the first pillar, it is estimated that more than USD100 billion of income taxation rights will be reallocated each year.

The original idea of the first pillar was to make giant high-tech enterprises pay taxes above a certain level in Market Jurisdictions where they actually operate. However, in the proposal submitted by United States in April 2021, the plan will be extended to large enterprises in all kinds of global businesses (including digital and non-digital economy).

2. The second pillar: determination of the global lowest enterprise income tax rate

The second pillar will set the effective lowest enterprise income tax rate in each jurisdiction of at least 15% to avoid the “race to the bottom” among multinational enterprises in low tax areas. According to the estimation of OECD, under the influence of the second pillar, USD150 billion of additional tax revenue will be generated every year.

Plan response and implementation schedule

130 jurisdictions (including China, India and the United States) representing more than 90% of the global GDP have expressed their consent to the above-mentioned plan up to now. Meanwhile, some traditional low tax jurisdictions (e.g. Ireland, Hungary, Barbados, etc.) do not agree to the plan, claiming that such plan undermines their independent tax policy-making power at the national / regional level.  Nevertheless, it is expected that this will not greatly affect the overall effectiveness of the plan since the measures under the plan will provide taxation rights in the headquarters location of the large multinational group or in the jurisdictions of its customers / users and the participation of most of the world's economies may be sufficient to enable these regulations to be effectively implemented.

As many details of the plan have yet to be resolved, the announcement stated that the remaining technical work will be further extended to October 2021. From an optimistic perspective, it is expected that the Two-pillar Plan will become effective in 2023.


l.Our observation

The Two-pillar Plan will be of great significance to the international tax system. After the implementation of the plan, we believe that it will have a joint impact on multinational enterprises (including the global development of Chinese enterprises and the investment and development of international enterprises in China).

The first pillar will effectively enhance the certainty of international taxation rights. Considering the scope of the application of the first pillar (with an annual revenue of more than EUR20 billion and a profit margin of at least 10%), the first pillar will have a profound impact on large multinational enterprise groups as it will provide taxation rights to the Market Jurisdictions. For example, large international enterprises with a large number of customers / users in the Chinese market with no legal entity presence may need to consider the long-term impact of the plan.

The second pillar will effectively enhance the tax revenue of some countries from a global perspective. At present, the lowest enterprise income tax rate in the world is between 10% and 12.5%. Setting the lowest effective enterprise income tax rate at least 15% (possibly higher) will significantly increase the tax cost of some large multinational enterprises, especially considering that 130 countries and regions (including China, India and the United States) representing more than 90% of the global economy have expressed support for the plan. Defining an "effective enterprise income tax rate" will become the key issue. The nominal enterprise income tax rate of many jurisdictions in the world is significantly higher than 15% (for example, the basic enterprise income tax rate of China is 25%), but each jurisdiction can provide many tax incentives through domestic legislation which can significantly reduce the effective enterprise income tax rate. If the second pillar cannot make clear provisions and definitions on "effective enterprise income tax rate", it will be difficult to promote the second pillar in essence.

Although the Two-pillar Plan will be implemented in 2023, considering that it will take time for the relevant provisions to be approved in the relevant jurisdictions, the actual implementation will take some time. Since the planned measures may have a significant impact on multinational group enterprises, we suggest that the large enterprises concerned should keep a continuous attention to the plan, track and evaluate the relevant impact in advance, so as to adjust their business operations in time, and seek professional advice and assistance if necessary.

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