How to manage the impact of international tax reform on global strategy

The international tax system is undergoing a major transformation that will affect how multinational enterprises (MNEs) are taxed worldwide. In October 2021, the OECD announced that 136 countries had agreed on a new two-pillar framework for international tax reform that will ensure that MNEs pay a fair share of tax wherever they operate and earn profits1. The new framework is expected to be implemented by 2023 and will have significant implications for the global strategies of MNEs.

The first pillar of the framework will reallocate some taxing rights over MNEs from their home countries to the markets where they have business activities and generate revenues, regardless of whether they have a physical presence there. This pillar will apply to MNEs with global turnover above EUR 20 billion and profitability above 10%, and will affect around 100 of the world’s largest and most profitable MNEs1. The second pillar of the framework will introduce a global minimum corporate tax rate of at least 15% that countries can use to protect their tax bases from profit shifting and tax competition. This pillar will apply to MNEs with global turnover above EUR 750 million and will generate around USD 150 billion in additional global tax revenues annually1.

The new framework will have a significant impact on the global strategies of MNEs, as they will need to adapt to the changing tax environment and manage the potential risks and opportunities arising from the reform. Here are some key aspects that MNEs should consider when managing the impact of international tax reform on their global strategy:

Review and revise their business models and value chains

MNEs should assess how the new framework will affect their current business models and value chains, and whether they need to make any changes to optimize their tax efficiency and competitiveness. For example, MNEs may need to reconsider their transfer pricing policies, their allocation of functions and assets across jurisdictions, their use of intangible assets and digital services, and their financing and investment decisions. MNEs should also evaluate the potential impact of the new framework on their customers, suppliers, partners, and stakeholders, and how they can maintain or enhance their value proposition and relationships with them.

Monitor and comply with the new rules and reporting requirements.

MNEs should keep track of the implementation and enforcement of the new framework by different countries and jurisdictions, and ensure that they comply with the new rules and reporting requirements. For example, MNEs may need to report their global income, taxes paid, and other indicators to each jurisdiction where they operate under a standardized template called the GloBE Information Return2. MNEs should also be prepared for increased scrutiny and audits by tax authorities, as well as potential disputes and litigation arising from the interpretation and application of the new rules.

Leverage the benefits of tax certainty and stability.

MNEs should take advantage of the benefits of tax certainty and stability that the new framework aims to provide. For example, MNEs may benefit from reduced compliance costs, reduced double taxation, reduced tax risks, and increased transparency. MNEs should also explore the opportunities for tax certainty offered by the new framework, such as binding dispute prevention and resolution mechanisms, safe harbors, penalty relief, and advance pricing agreements.

Engage with policymakers and stakeholders.

MNEs should engage with policymakers and stakeholders to voice their concerns and suggestions regarding the design and implementation of the new framework. For example, MNEs may provide feedback on technical issues, such as the recognition of existing minimum taxes, the design of domestic top-up taxes, or the treatment of specific transactions or sectors2. MNEs should also communicate with their stakeholders about how they are adapting to the new framework and how they are contributing to a fairer and more sustainable international tax system.

The international tax reform is a historic milestone that will reshape the global tax landscape for decades to come. MNEs should proactively manage the impact of the reform on their global strategy and seize the opportunities for growth and innovation in a more level playing field.

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References:

(1) OECD announcement of agreement on International Tax Reform - BDO Global. https://www.bdo.global/en-gb/insights/tax/international-tax/global-tax-oecd-announcement-of-agreement-on-international-tax-reform

(2) International tax reform: OECD releases technical guidance for .... https://www.oecd.org/tax/beps/international-tax-reform-oecd-releases-technical-guidance-for-implementation-of-the-global-minimum-tax.htm

(3) 130 countries and jurisdictions join bold new framework for ... - OECD. https://www.oecd.org/newsroom/130-countries-and-jurisdictions-join-bold-new-framework-for-international-tax-reform.htm

(4) 136 out of 140 countries join OECD global tax deal - RTE.ie. https://www.rte.ie/news/2021/1008/1252439-corporate-tax-reform/

(5) International Tax Reform: Challenges to Multilateral Cooperation. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4203806