The OECD and the evolution of international taxation.

The Organization for Economic Cooperation and Development (OECD) is addressing international tax challenges with a two-pillar approach, as agreed by the Inclusive Framework (IC) of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project in 2021. The BEPS Project has made significant progress in establishing measures to prevent artificial profit shifting by multinational enterprises (MNEs).

Pillar One focuses on profit allocation and the nexus concept. It moves away from traditional taxation based on “physical presence” by transferring taxing rights to the jurisdictions where business activities occur and profits are generated, known as market jurisdictions. The Pillar One provisions apply only to the largest multinational corporations, i.e., those with global revenues of more than 20 billion euros and a pre-tax profit margin of more than 10 percent.

The Pillar One approach is technically complex and will result in new taxing rights arising in favor of market jurisdictions. This will allow the taxation of residual profits in jurisdictions that generate at least €1 million in revenue (€250,000 for jurisdictions with a GDP of less than €40 billion). The allocation of a minimum profit for routine functions related to marketing and distribution activities is another aspect of Pillar One.

Pillar Two introduces a global minimum tax rate of 15 percent to reduce the incentive for MNEs to operate in low-tax jurisdictions, limit interstate tax competition and promote income tax sustainability. This pillar aims to ensure that MNEs pay a reasonable amount of tax in the countries where they generate profits and avoid exploiting loopholes in the international tax system.

In summary, Pillar One and Pillar Two represent a new approach to international taxation of MNEs that aims to prevent artificial profit shifting and ensure that MNEs pay a fair amount of tax in the countries where they generate profits.