In a landmark deal set to reform the international tax landscape, 130 OECD member countries including New Zealand signed up to an agreement to address concerns that multinational entities (“MNE”) should pay their fair share, wherever they operate.
Of the 139 countries involved in the discussions, 9 declined to sign up to the agreement being Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, Sri Lanka and St Vincent and the Grenadines. Peru has abstained as it currently does not have a government.
According to the OECD, the signed agreement aims to update “key elements of the century-old international tax system, which is no longer fit for purpose in a globalised and digitalised 21st century economy”.
The proposal framework is a two-pronged global tax reform agreement or also known as a two-pillar framework. The general principles for the pillars are:
Pillar One –
An MNE’s overall profit is first determined based on certain rules and formula. The determined residual profit is then allocated to the various countries in proportion to the MNE’s consumers in each country also known as a “market jurisdictions”. The allocated profit is the amount that each country will be able to tax the MNE on.
It is a shift from the current international taxing framework whereby MNEs are generally taxed based on their physical substance. This approach instead allocates profits and taxing rights to countries based on an MNE’s market presence and where they are actually doing business. This approach impacts, largely significant technology companies.
Pillar Two –
All countries agree to a global minimum corporate tax rate of at least 15 percent. With a set global minimum corporate tax rate, the second pillar introduces a corporate income tax floor that countries can use to protect their tax bases. This approach is intended to act as a disincentive from profit shifting to lower tax jurisdictions and treaty shopping.
Safe harbours will apply. It is intended that in-scope companies will include those with global turnover of more than $20 billion Euros and profitability above 10%, although adjustments will be made for smaller countries with lower GDP.
All participating countries have agreed to the removal of all Digital Services Taxes that may have been introduced. Although a digital services tax was signalled in New Zealand, no such tax has been introduced to date.
The application and detail of how the framework will apply are yet to be finalised, though a fairly optimistic timeframe has been set with October 2021 for finalising the remaining technical elements of the two-pillar approach, and a subsequent plan for effective implementation in 2023.
Overall the proposed changes are unlikely to impact New Zealand to any great degree or generate significant tax revenue for New Zealand, as by design, the two pillars impact only a small class of taxpayers globally –
- Pillar One applicable only to MNEs which have a global turnover above 20 billion euros and net profitability above 10%; and
- Pillar Two applicable to MNEs that meet a 750 million euro revenue threshold, although countries are able to adopt lower thresholds for MNEs headquartered in their country.
Furthermore, given the population and market size, New Zealand is unlikely to receive more allocation of the profit under Pillar One. Under the Pillar Two approach, with the New Zealand corporate tax rate above the agreed 15% minimum rate, this is unlikely to impact New Zealand MNEs that operate in other jurisdictions.
The New Zealand government welcomes the agreement but acknowledges the extra tax from the proposed changes was not expected to be significant in terms of the country’s overall corporate tax take, which accounts for about 14 per cent of total taxation.