OECD targets global tax reform to align with increasingly digitalised economy

The OECD two-pillar solution for global tax reform stems from ongoing efforts to improve the international tax system to make it ‘fairer’. This initiative seeks to tackle a growing concern that the traditional tax framework was not well equipped for an increasingly digitalised and globalised economy.

Pillar One is designed to deal with the fact that increasing digitalisation of business means that traditional taxing rights that turn on whether a group has a physical presence in a jurisdiction no longer seem fit for purpose. This was leading to a growing public perception that large multinationals (and in particular "big tech") were not paying their "fair share" of tax, leading to a number of jurisdictions introducing their own digital taxes in various shapes and forms). This pillar targets “the largest and most profitable multinationals” (those with global turnover above €20bn and profitability above 10 percent of revenue).

Pillar Two is instead tackling a different issue, namely groups shifting profits to low or zero tax jurisdictions to reduce their tax bill. The compromise reached is for a global minimum effective rate of tax of 15 percent with the revenue threshold for Pillar Two being much lower (€750m).

Some economists expect the deal to incentivise multi-national enterprises to repatriate capital to the country in which their headquarters are based (after years of trying to do the opposite). If that turns out to be correct then there will inevitably be a resulting boost for those economies. Given the threshold requirements, we are actually only talking about a handful of multi-national enterprises headquartered in the world’s richest countries and as such, it is understandable that developing nations may have concerns as to whether these measures really will yield fair results.