On June 5, 2021, the G7 agreed to global tax reform measures targeting large multinational companies (MNEs). The tax reform aims to: a) tax multinationals in the countries where they operate; and b) subject multinationals to a global minimum tax rate of at least 15% (the June 5 Agreement).
Less than a month later, 130 countries and jurisdictions, including Canada and the United States, have issued a Statement to work collaboratively to reform the international taxation rules and to ensure that MNEs pay a fair share of tax wherever they operate. In particular, these countries and jurisdictions endorsed the two-pillar approach:
- Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. 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 MNEs have a physical presence there.
- Pillar Two seeks to introduce a global anti-base erosion rule through the introduction of a global minimum corporate tax rate of 15% that countries can use to protect their tax bases.
The participating nations have set October 2021 as the deadline for finalizing the remaining technical work on the two-pillar approach, with a plan for effective implementation in 2023.
Middle market companies with significant digital sales or those with low global effective tax rates should carefully review the Statement as the two-pillar approach is likely to impact business decisions.
