During the last couple of months, a lot has been said about the international tax deal. Whilst the main focus was on the global minimum tax rate of 15%, the deal also includes another reform, whereby profits of large companies will be allocated to the jurisdictions where the revenue is generated and not simply to the country of tax residence.

In the last few days, 136 countries agreed to the deal, and now await the OECD to publish its model rules, with the European Commission to follow and publish its Directive on the minimum global tax by year end. Ireland, which was one of the main countries opposing the deal, in view of the low corporate tax rate of 12.5%, also agreed to the deal, amid international pressure.

It is expected that the global minimum tax section of the deal will be implemented before the reform relating to the reallocation of profits to market jurisdictions, also because it is the simpler part of the agreement to implement. This will see the introduction of a minimum global tax rate of 15% for all companies, irrespective of the sector they operate in, with an annual turnover of not less than €750m. Whilst the original idea to tax global companies was focussed on digital companies, there is now no distinction between ‘digital’ and ‘other’ companies. As a result of the above-mentioned focus on digital companies, throughout the last couple of years, a number of countries introduced a Digital Services Tax (‘DST’) in their domestic legislation to tax digital businesses. The G7 agreement states that it will provide appropriate coordination between the application of the new rules and the removal of all DSTs, as otherwise this too would result in major double tax issues and disputes. One will need to understand how this will be achieved.

It is important to remember that the global minimum tax will apply only to companies with a threshold above the €750m, as mentioned above. On the other hand, the reallocation of profits rule will apply to multinationals with global turnover above €20 billion and profit margins of not less than 10%.  This means that the majority of the companies worldwide will not be impacted by this new deal and will continue to be taxed as they have been so, prior to this agreement. 

This agreement is expected to increase global annual tax revenues by around €150 billion.

October 2021

The writer is a co-founding partner of Seed, an internationally focused research-driven advisory firm based out of Europe (Malta) and the Middle East. 

www.seedconsultancy.com | nicky@seedconsultancy.com