Where businesses are based largely determines how they are taxed. However, in recent years, the concurrent globalisation and digitalisation of the economy have complicated this approach to taxing large multinational enterprises (MNEs). Because MNEs operate in multiple countries, with a little strategic profit shifting they can ensure that they’re only paying taxes in the jurisdiction with the most favourable taxation system. The Organisation for Economic Co-operation and Development (OECD) Pillar Two model rules are designed to ensure MNEs at least pay a set minimum amount of tax, regardless of the jurisdictions in which they operate.
Introducing the OECD
As a bit of background information, the OECD was founded primarily to improve social and economic well-being globally. One way this international organisation serves its mission is by advising and supporting governments around the world to implement fair and efficient systems for international taxation.
Starting in 2013, the OECD has been working to address the artificial shifting of profits to low or no-tax jurisdictions through the Base Erosion and Profit Shifting (BEPS) initiative. In recent years, BEPS has become of growing concern, as the increasingly digitalised and globalised economy makes it easier for MNEs to strategically shift profits to low or no-tax jurisdictions. In response to this practice—as well as the social and economic issues it creates—the OECD introduced the Pillar Two framework for establishing a global minimum tax.
Why OECD Pillar Two Matters
At its core, Pillar Two seeks to ensure that MNEs are all paying the same minimum level of tax—specifically, a 15% effective tax rate—regardless of where they operate. This move aims to reduce profit shifting and the race to the bottom on corporate tax rates that have emerged in recent decades.
Pillar Two’s Global Anti-Base Erosion (GloBE) model rules apply in jurisdictions that have enacted the model rules into their domestic tax law to MNEs with consolidated revenue exceeding €750 million. These rules are designed to combat base erosion and profit shifting by establishing a coordinated system of top-up taxation, which ensures that income taxed below the minimum rate in one jurisdiction is effectively brought up to that rate through additional taxation elsewhere.
Strategic Importance to Tax Professionals
For tax professionals, Pillar Two’s significance goes beyond compliance. These rules introduce a new layer of complexity in global tax planning and modelling, requiring greater coordination across jurisdictions. MNEs must now contend with additional calculations, enhanced data collection, and increased disclosure requirements.
Governments are moving quickly to adopt these standards. Of the 147 nations that are members of the Inclusive Framework on BEPS, a number—including the UK—have already enacted large portions of the model rules. As more jurisdictions introduce legislation aligned with the OECD Pillar Two framework, tax experts will be under growing pressure to understand how these rules affect their clients.
Looking to the Future of Tax
More than just another set of rules for tax experts to contend with, Pillar Two represents a major shift in how taxes are levied. After decades of businesses becoming more globally interconnected, tax is following suit. With this shift, tax professionals will need to think beyond borders, to prepare their clients for the future of tax.
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