Positive impact of international tax reform (OECD)

Revenue gains from implementing the historic agreement to reform the international tax system will be greater than originally expected, according to an analysis by the Organization for Economic Co-operation and Development (OECD), published on Wednesday .

The two-pillar solution to solve the tax challenges raised by the digitalization and globalization of the economy will entail the allocation of additional taxing rights for market jurisdictions and limit tax competition by establishing a global minimum tax on corporate profits at the rate of 15%, the Paris-based organization said in a statement.

“It is now estimated that the proposed global minimum tax will result in annual global revenue gains of around USD 220 billion, or 9% of global corporate tax revenue,” notes the OECD, which notes that this amount is significantly higher than the previous estimate by the OECD of the additional tax revenue generated by the component relating to the minimum tax of “Pillar Two”, which was established at 150 billion USD.

With regard to “Pillar One”, which is designed to ensure a more equitable distribution among the jurisdictions of the taxing rights over the largest and most profitable multinational enterprises (MNEs), the forecast now assumes the allocation each year to the jurisdictions of the market of rights of taxation relating to approximately 200 billion USD of profits. This is expected to translate into annual tax revenue gains of between USD 13 billion and USD 36 billion, based on 2021 data.

This new estimate is significantly higher than previous ones, which relied on the reallocation of USD 125 billion in profits, the Organization said, adding that the analysis shows that low- and middle-income countries stand to gain the most, as a percentage of existing corporate income tax revenue.

“The international community has made solid progress in implementing these reforms, which are designed to make our international tax regimes fairer and enable them to function better in the context of a digital and globalized economy,” the Minister said. Secretary General of the OECD, Mathias Cormann, quoted in the press release.

“The new economic impact analysis once again underlines the importance of rapid, effective and widespread implementation of these reforms so that these considerable revenue gains can materialize. Widespread implementation will also contribute to stabilizing the international tax system, improving legal certainty in tax matters and avoiding the proliferation of unilateral digital services taxes and related trade and tax disputes, which would adversely affect global economy and on economies around the world,” he added.

These new estimates of the economic impact of the two-pillar solution are based on updated data and incorporate most of the conceptual features recently adopted and collected in the progress report on “Amount A” and the “Model of GloBE Rules”, many of which have not been taken into account in other studies, explains the OECD.

Updates to previous OECD assessments, including the Economic Impact Assessment published in October 2020, show that projected revenue gains under “Pillar One” are on the rise and continue to rise, in not only because of the revised design of the tax reform, but also because of the increased profitability of “covered MNEs”.

It also highlights an increase in the projected tax revenue gains generated under “Pillar Two”, which reflects a slight increase in low-taxed profits worldwide, in particular due to the improvement in the scope of the data covered, according to the same source.

The analysis highlights that small and low-income countries would particularly benefit from many of the design features presented in the recent Amount A progress report.

And note that the latest results were presented on Wednesday during a webinar and that a complete economic impact analysis as well as a detailed methodological report will be published in the coming months.

Working with more than 100 countries, the OECD is an international policy forum dedicated to promoting policies that safeguard individual freedoms and improve the economic and social well-being of people around the world.

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