While there is still a great deal of wood to chop, a recent milestone agreement by 137 countries means it’s not too early for multinational enterprises (MNEs) to begin considering how the proposed OECD international corporate tax framework stacks up for them.
In early October, an overwhelming majority of countries in the OECD Inclusive Framework on Base Erosion and Profit Shifting (IF) preliminarily committed to a two-pillared plan intended to make the global playing field more level and discourage “races to the bottom,” where certain jurisdictions create tax havens for corporate entities.
Pillar One creates a formula that would compel most of the world’s biggest companies to allocate more of their profits to the markets from which their revenue is sourced.
Pillar Two stipulates a minimum effective tax rate for IF countries and would apply to companies with an annual turnover in excess of $870 million (€750 million).
Members of the IF are targeting an effective date of 2023 for the two pillars. That seems aggressive from a practical implementation standpoint, considering key details of both pillars have not been worked out, and unrealistic from a political one, since major components of the plan will need to be ratified in each of the member countries. One need look no further than the U.S., where Republican lawmakers have already signaled deep skepticism about the initiative, to appreciate that ratification will be a drawn-out process and that ultimate passage is far from guaranteed.
However, notwithstanding the substantial obstacles, the IF proposals are so significant and their details so complex that companies with international operations would do well to begin considering the implications for their effective tax rate, their global operating models, and their strategic plans.
Effective Tax Rates
The second pillar of the IF requires members to adopt a minimum tax rate of 15%. At the last minute, Ireland convinced members to drop an “at least” qualifier to the 15% minimum that the country feared would leave the door open to easily raising that floor in the future. Under the IF framework, the minimum would nominally apply only to companies with annual sales of more than $870 million (€750 million). In addition, MNEs with less turnover may also be impacted as different jurisdictions overhaul their tax codes to conform with the IF.
The Pillar One formula for allocating profits—one-quarter of before-tax profits in excess of 10% of revenue—will also have a major impact on the effective tax rate for MNEs that meet the qualifying threshold (profits above 10% and global turnover above $23.3 billion (€20 billion)).
Companies may want to consider performing back-of-the-envelope calculations regarding the impact of the new framework on their overall effective tax rate.
Operating Models and Strategic Planning
In addition, MNEs may also want to evaluate the potential impact of the global minimum tax deal on their current operating structure and strategic initiatives under consideration.
Broadly speaking, one might expect IF to lead MNEs to shift from centralized operating structures to multi-hub models where high-value business functions are spread out across multiple jurisdictions. Indeed, this trend was already underway with the increased prevalence of flexible working arrangements facilitated by technological advances and accelerated by the pandemic.
This potential shift from centralized to multi-hub operating models through business restructurings and reorganizations may result in increased valuation needs from business, financial reporting, and tax perspectives as well.
The IF is not a done deal by any stretch. But the stakes are high, and MNEs that want to be ready may want to consider evaluating its possible impact on their tax liability and work with valuation professionals and other professional service providers to incorporate the impact of the implementation into their long-term strategic planning accordingly.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Tom Gottfried is a managing director at Valuation Research Corporation, specializing in global tax matters. He has over 15 years of experience in planning, facilitating and leading engagements related to corporate reorganizations, mergers & acquisitions and restructurings.
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