Minimum Global Corporate Tax Rate 2021

Background

• OECD which stands for Organization for Economic Cooperation and Development (Center for Tax Policy & Administration) announced on Fri, 08-Oct-2021 on a radical overhaul of international corporate tax framework which should be completed before end of October 2021. This enables an additional collection potential of $150 Billion from multinational companies operating in the countries in the pact.

What does the law say?

• Any company operating inside the land of agreed countries (136 of them or ~90% of world GDP) have to pay a corporate tax of >=15% (which we call the floor rate)

Who pushed for it?

• OECD started the fire. G-7 and G-20 countries kept the fire burning until a whole bunch of them said 'Yes'. Happy Marshmallow times.

Why does it matter?

• Change in tax processing logic and engines for companies operating in countries where existing tax rates are less than 15%.
• Who are they? Check this link out.
• Customers such as you and me paying value added taxes and social security taxes can expect also the multi-national companies to pay their fair share of taxes. Currently several MNCs end up paying effective tax rates of almost 0%.

Anticipated Changes - Business Process

• Unification of tax jurisdictions
• Reporting Standards to be "adjusted" to the location of services/operation/sales instead of headquarters location (no more brick-and-motors world).
• Incorporate new measures to instill competitiveness in countries/jurisdictions. Example - Roll back of sister taxes such as "Digital Taxes" logic which are applied by countries such as India and US. This needs to be further vetted to Multilateral Convention's measures as part of BEPS.
• BEPS (Base Erosion & Profit Shifting) Action Plan framework changes on
  • Tax Platform toolkits for Effective Tax Rate tests
  • Revision on Tax Bases, Segmentation, Marketing & Distribution profits, Quantum thresholds on revenue and Income Inclusion Rules (IIR).
• Multilateral Instruments (MLIs) need to be modelled which are expected to be rolled out by mid-2022 to facilitate implementation of STTR (Subject to Tax Rule Changes)

Anticipated Changes - Forecasting Models

• Develop numerical solver models which can run through various tax jurisdictions applied over business projections and plans for the entity in concern to yield the projected effective tax rates.
• Simulate effects of M&As, Corporate Restructuring and other organization changes in relation to "permanent establishment" clauses and generate effective tax rate based on "critical mass" of the entities
• Simulate FX hedging on top of above scenarios
• Simulate portfolio optimization techniques based on premiums and discounts offered in various tax jurisdictions (Pillar 1 vs 2)

Anticipated Changes - Reporting

• Tax Transperancy Reporting: AEOI (Automatic Exchange of Information) Standard Changes
• Common Reporting Standard (CRS) changes to adhere to FATCA compliance.
• TRACE (Treaty Relief and Compliance Enhancement) reporting using AI system.

Summary

Timeline is short. Concrete implementation is expected to go live by 2023. Technology stacks need to be revised and catch-up on the same.