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Updated political agreement on global tax reform

Tax Alert - November 2021

By Annamaria Maclean & Jeremy Beckham
 

In July 2021, the Organisations for Economic Co-operation and Development (OECD) and Group of Twenty (G20) Inclusive Framework on BEPS (Inclusive Framework) released a statement on a two-pillar solution to address tax challenges arising from the digitalisation of the economy. The July statement determined that both the Pillar One and Pillar Two proposals will come into effect in 2023 but certain key design elements and a detailed implementation plan were left open to be agreed at a later time. On 8 October, the Inclusive Framework released a further statement finalising these details.

You can find detailed commentary on this latest statement including Pillar One and Pillar Two highlights here (or if you prefer feel free to listen to this excellent podcast produced by Deloitte US). We have summarised below some of the main takeaways that New Zealand taxpayers should be aware of.

Additional details that have been agreed

A number of the key building blocks that will from part of the Pillar One and Pillar Two architecture were agreed as part of the October statement released by the Inclusive Framework. Key among these are:

  • The amount of residual profit to be re-allocated to market jurisdictions above a deemed routine return of a 10% profit margin on sales under Amount A of Pillar One has been set at 25%.
  • The agreed rate of minimum tax for Pillar Two’s Global anti-Base Erosion (GloBE) rules will be 15%.
  • The rate for the Subject to tax Rule (STTR) is agreed at 9%. This is an enhanced taxing right for developing countries.

Of the above, the proposal that is expected to have the biggest impact on New Zealand taxpayers is the minimum tax under Pillar Two, noting this will apply to multi-national enterprises (MNEs) with turnover above EUR750 million.

In respect of Pillar One, only MNEs with a global turnover above EUR20 billion (reducing to EUR10 billion after 8 years) and profitability above 10% will be in scope of the Amount A residual profit reallocation (we note though that the simplification of the application of the arm’s length principle under Amount B may still be relevant).

Further, the STTR is only expected to be implemented into double tax agreements with developing countries where the other country has nominal corporate tax rates below 9% applying to interest, royalties or a to-be defined set of other payments. This may have limited application to New Zealand’s tax treaty network given New Zealand taxes most forms of income at the company tax rate of 28%.

Agreement on unilateral measures

A multilateral convention (MLC) will require all parties to remove all Digital Services Taxes (DSTs) and other relevant measures with respect to all companies (not just those within scope of Pillar One Amount A). Further, members of the Inclusive Framework have committed not to impose any newly enacted DSTs (or other relevant similar measures) on any company until the earlier of 31 December 2023 or the coming into force of the MLC. This will give time for the two-pillar solution to be built into the international tax framework. Separately, we note that a transitional approach has been agreed in relation to existing unilateral measures in a joint statement by certain Inclusive Framework members reflecting a compromise reached.

Readers may recall that the New Zealand Government set out a framework for a DST in 2019. Interestingly, the Government has not yet issued a formal statement taking the DST off the table. We understand the view of some tax authorities is that countries are still free to legislate for a DST so long as taxes are not imposed (pending progress on Pillar One within the timeline mentioned above).

Release of the detailed implementation plan

The October statement includes a detailed implementation plan that retains the same ambitious timeline for implementation of the two-pillar solution in 2023. Refer below for the key milestones going forward:
 

 

The statement notes that the Inclusive Framework will continue to progress this work in consultation with stakeholders, however this will need to occur within the constraints of the timeline set forth in the implementation plan. Given the volume of technical work that is left to be undertaken this may limit the opportunities for businesses to be consulted on the detailed technical provisions before they are implemented.

The time to prepare is now

Although the timeline is ambitious, the OECD is expected to deliver to this timeline and the two-pillar solution has now achieved a significant amount of political support and consensus. While there are several important obstacles remaining (including consideration by US Congress), New Zealand taxpayers should be thinking now about how the two-pillar solution will impact their businesses and operations. Deloitte can assist with modelling the impact of these changes to help you assess and evaluate the potential future implications of Pillar One and Pillar Two. Further information on our Deloitte modelling can be found here. We can also help you understand the future impact of the proposed Pillar One and Pillar Two changes on any investment and business decisions you are making today.

If you would like to know more please contact your usual Deloitte Tax Advisor.

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