Pillar 1 and Pillar 2 – global tax reform
The introduction of an international taxation system for large corporations was approved by more than 100 countries in 2021. The minimum rate of the single tax will be 15%, and in order for the system to start working, countries must pass the relevant laws. At the moment, the start of application of such rules is planned from 2024.
The reform is based on two “pillars” – documents published by the OECD. Pillar 1 provides for the redistribution of the rights to tax the excess profits of the largest international groups of companies (IGCs) in favor of the countries of sale. According to the concept of Pillar 1, a part of the profits of the IGC will be taxed in the countries where the users/consumers are located, regardless of whether the IGC has any presence in the countries. Surplus profit will be distributed to the sales countries only of those IGCSs whose global turnover exceeds 20 billion euros (perhaps later this threshold will be lowered to 10 billion euros).
Pillar 2, in turn, guarantees taxation of the income of the IGCs at least at a minimal level. Under the Pillar 2 concept, if the effective tax rate in the individual jurisdictions in which the IGC is present is less than the minimum tax, an additional tax will be levied to compensate for the difference. Generally, such additional tax will be levied at the ultimate parent company level. If the recipient’s home country’s adjusted nominal tax rate is lower than the minimum, an additional tax will be charged to compensate for the difference. The minimum tax rate will be 15%. All jurisdictions in which IGCs are filed must have an effective tax rate of at least 15%.
One of the main principles of Pillar 2 is balance. This means that the rules should be applicable to all companies equally and should not lead to additional inequality between companies of different countries or sectors of the economy.
Another principle that Pillar 2 follows is risk-orientation. This means that the rules should be aimed at reducing the risks associated with tax evasion and illegal transfer of profits to countries with low tax rates. In particular, the rules should take into account risks such as transfer pricing risk, the risk of shifting profits across borders and the risk of using subsidiaries and branches for tax purposes.
The next principle is the minimization of negative economic consequences. This means that the rules should be stable and should not lead to significant economic losses for companies or countries.
Finally, another principle is the coordination of international actions. This means that the rules must be harmonized between different countries to avoid double taxation and other problems associated with different tax systems.
The OECD estimates that countries could cut losses by up to $50 billion a year thanks to new tax rules for large international companies. In general, the introduction of an international taxation system should ensure a fairer and more efficient tax system, reduce tax gaps between countries and lead to an increase in tax revenues for state budgets.
Pillar 2 is a relatively new concept in the tax field and its application is still in its infancy. However, it is already possible to draw several conclusions about its prospects.
First, the use of Pillar 2 will allow states to more effectively fight tax evasion and avoid unwanted tax competition. This, in turn, can lead to an increase in state revenues, an improvement in the investment climate, and an increase in the competitiveness of the economy.
Second, the use of Pillar 2 can help countries more fairly distribute the tax burden between national and international companies. This is due to the fact that tax bases will be calculated taking into account the real economic contribution of companies to countries, and not taking into account their use of tax tricks.
Despite this, Pillar 2 may also face criticism from some states, which may lose their advantages in the field of taxation and therefore investment. In addition, there may be technical difficulties in the implementation of this reform, as well as disputes between states regarding the distribution of tax bases and revenues.
Nevertheless, taking into account that international tax rules are under review, the use of Pillar 2 can be an important tool in creating a fairer and more efficient tax system in the future