According to the OECD, the historic agreement would ensure an extra $150bn in taxes is paid by large corporations annually and that $100bn of profits will be reallocated each year to countries in which the corporations earn profits which are not taxed there. It hopes to have the rules in place next year, to be implemented in 2023.

The scale of the agreement broke new ground in bringing ideologically opposed countries and jurisdictions together. French finance minister Bruno Le Maire tweeted: “More than 130 countries, including China, India and Russia have agreed to international taxation at the OECD. It is a historic, ambitious and innovative agreement, unheard of for a century.”

Hard-fought negotiations

The OECD has spent more than a decade negotiating the two-pillar package, pushing for multinational enterprises (MNE) to pay tax where they operate and earn profits.

The economic organisation said it would add “much-needed certainty and stability to the international tax system”.

Pillar one aims to ensure “a fairer distribution of profits and taxing rights” among countries with respect to the largest MNEs, including the so-called Big Tech stalwarts. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.

In-scope for pillar one are MNEs with global turnover above €20bn euros and profitability above 10% (ie profit before tax). Extractive industries and regulated financial services will be excluded from the rules on where multinationals are taxed.

Pillar two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.

Countries do not have to set their rates at the agreed floor but under the agreement, other jurisdictions have the right to apply a top-up levy to the minimum on companies’ income coming from a country that has a lower rate.

Pillar two rules will apply to MNEs that meet the €750m threshold as determined under BEPS Action 13 (country-by-country reporting), although exemptions also apply.

The tax rate rules will not apply to government entities, international organisations, non-profit organisations, pension funds or investment funds that are ultimate parent entities of an MNE Group or any holding vehicles used by such entities, organisations or funds. The rules will also provide an exclusion for international shipping income.

Post-COVID recovery boost

The OECD said the two-pillar package will help governments repair their budgets and balance sheets as the world economy tries to recover from the coronavirus pandemic.

Under Pillar One, taxing rights on more than $100bn of profit are expected to be reallocated to market jurisdictions each year. The global minimum corporate income tax under Pillar Two - with a minimum rate of at least 15% - is estimated to generate around $150bn in additional global tax revenues annually.

“After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere,” said OECD Secretary-General Mathias Cormann. “This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions,” Cormann said.

Nine holdouts

EU countries Estonia, Hungary and Ireland, where Facebook, Microsoft and Amazon have headquarters, along with, Barbados, Saint Vincent and the Grenadines, Sri Lanka, Nigeria and Kenya did not agree on the tax rate for multinationals. Peru abstained pending election of a new government.

The Irish government signalled its “broad support” for the agreement but noted its reservation about the proposal for a global minimum effective tax rate of ‘at least 15%’.

“As a result of this reservation, Ireland is not in a position to join the consensus,” the Irish finance ministry said in a statement.

Those who choose not to sign up may not benefit from the plans, which carry a “top-up” provision so that a parent company would get an additional bill if a subsidiary paid less than the minimum.

The agreement did not win universal praise, with some charities arguing the deal favoured rich countries over developing areas.