The International Corporate Tax Reform

The international tax reform has been discussed for . However, we are now entering the year of its suspected implementation. So, what is the international tax reform, what will it mean for businesses, and what is still being debated on it?

At the start of 2021, 130 countries and jurisdictions within the Organisation for Economic Cooperation and Development to agree on a certain tax reform and, after a long process of debating the international tax frameworks, agree on a possible two pillar reformation. By August of 2021, countries and member jurisdictions had joined, amounting to more than of the world GDP. 

The reform breaks down into two main pillars. The of reform surrounds multinational companies that sell to a population/state where they have few to no business operations. Something that has been “increasingly common when firms sell through digital channels,” the International Monetary Fund. The does not allow a country to tax any profits on these sales when there is an absence of physical factories or territories. The reform countries to tax sales where the final consumers are located, not only where the company is located. 

consists of a global minimum effective tax rate of 15%. This is completed through . This is if one country where the product is sold taxes underneath the 15% rate, the country where the company is headquartered that company to reach the total minimum of 15%. 

The of these tax reforms are to fight against certain business norms that are being exploited to promote unethical business practices. With pillar one, is to make the tax system stronger against tax base erosion. In particular, to defend against aggressive tax planning, where companies shift their operations and profits between group entities to lower-tax countries, of countries’ tax bases and . For pillar two, addresses what is known as the race to the bottom. The describes a common situation where, according to , a “company, state, or nation attempts to undercut the competition’s prices by sacrificing quality standards or worker safety, or reducing labor costs…[sometimes this can be done] between governments to attract industry or tax revenues [as well].” to lower the toxic competition that leads to unethical business practices, while allowing governments to , and will cut back on profit shifting towards investment hubs.

The IMF reports that the reform is still very complex and still in need of further discussion and reform, with pillar one only . The implementation of these pillars is still a point of concern as well, but recently to become implemented. The fear is that the GDP increase for developing countries due to concerns surrounding implementation.

The rollout of these new reforms is between this year and next (2023-24), meaning that many companies are beginning to gear up for this possible large change amongst the multinational corporation tax system. the alignment of supply chain and tax strategies, a complicated issue that will only continue as these changes continue to be implemented and debated over the next few years.