Earlier this month, the Organisation for Economic Cooperation (OECD) released blueprint reports on a "two-pillar approach" that aim to ensure multinationals pay their fair share of tax in the countries they operate in.
The two-pillar approach is one of nexus and profit allocation and another of ensuring a minimum level of taxation.
"Pillar one is centred on how should the profits of a multi-national trading in a whole range of jurisdictions, selling products into those jurisdictions and making profits, according to who buys them, which country really has the right to the lion's share of those," Australian Taxation Office (ATO) corporate and international tax division head Paul McCullough told Senate Estimates on Tuesday.
"The proposition is that since the profit is generated from the consumer element of the economy, then that fraction should be taken into account when calculating the profits … for example, a US company selling into India … then some portion of their profit should be reallocated to the Indian jurisdiction."
Pillar two, effectively a global minimum tax idea, simply says if one of the countries hasn't applied what is determined as the minimum level of tax, then that should be topped up by other participating countries.
"Together, these two ideas have been pursued, the OECD has made a mammoth effort to produce just last month about 400 pages of design for these two pillars, it went to the G20 finance ministers a couple of weeks ago … and they endorsed the idea for further negotiation," McCullough said.
The OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) brings together 137 member jurisdictions. It states that both pillars combined could increase global corporate income tax revenues by about $50-$80 billion per year.
"Pillar one would involve a significant change to the way taxing rights are allocated among jurisdictions, as taxing rights on about $100 billion of profit could be reallocated to market jurisdictions. This would lead to a modest increase in global tax revenues. On average, low, middle and high income economies would all benefit from revenue gains, while 'investment hubs' would tend to lose tax revenues," the OECD explained in a blog post.
"Pillar Two would yield a significant increase in CIT revenues and significantly reduce the incentives for MNEs to shift profits to low-tax jurisdictions, which would generate revenue gains in addition to the direct gains resulting from the implementation of the new rules."
The OECD also said a consensus-based multilateral solution involving pillar one and pillar two would lead to a more favourable environment for investment and growth than would likely be the case in the absence of an agreement by the Inclusive Framework.
In their latest communiqué, G20 Finance Ministers said they were committed to further progress on both pillars and urged the Inclusive Framework to address the remaining issues with a view of reaching a global and consensus-based solution by mid-2021.
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