Global Minimum 15% Corporation Tax Targets Digital Companies

Globalisation and digitalisation have facilitated legal tax avoidance by allowing multi-national

enterprises (MNEs) to shift profits to low or no tax jurisdictions. This has impacted domestic

tax revenues for G20 and OECD member countries. In response, the G20 and OECD member

countries jointly developed 15 pillars in 2016 to combat base erosion and profit shifting (BEPS)

to ensure MNEs are paying a ‘fair’ share of taxes wherever they do business [1].

The OECD has convinced 136 countries that comprises more than 90% of global GDP, including

the UK, to move forward on the joint statement signed earlier this summer to establish a

global minimum tax rate of 15%. This addresses the second of 15 pillars in the BEPS project.

The agreement will apply to MNEs with revenue above EUR 750 million. The measures also aim

to stabilise the international tax system and increase certainty for taxpayers and

administrators [2].

Traditionally, entities are taxed on their profits by the countries in which they reside and/or

where they have a permanent establishment. MNEs used this rule to establish themselves in

low or no tax jurisdictions and were careful to minimise any permanent establishments in

higher tax jurisdictions. This became strategically beneficial for digital companies that do not

require a physical presence. Such companies would earn revenues from markets in high tax

jurisdictions and were taxable in low to no tax jurisdictions. The BEPS project, including the

global minimum tax, aims to ensure a minimum amount of tax is paid on profits by

MNEs irrespective of where they reside or have a permanent establishment. Once legislated

within each member country, digital MNEs will have to re-evaluate their corporate

organisational structures and tax strategies.

[1] OECD, ‘International collaboration to end tax avoidance’

<https://www.oecd.org/tax/beps/> accessed 23 January 2022.

[2] OECD, ‘International community strikes a ground-breaking tax deal for the digital age’ (8

October 2021)

<https://www.oecd.org/tax/international-community-strikes-a-ground-breaking-tax-deal-for-

thedigitalage.htm#:~:text=Transfer%20pricing-,International%20community%20strikes%20a%20

ground%2Dbreaking%20tax%20deal%20for%20the,15%25%20tax%20rate%20from%202023>

accessed 23 January 2022.