Turning point for the digital economy
Tax laws have long been outdated by the realities of a global economy, in which companies operating digitally are not necessarily close to their clients anymore. It has required years of diplomatic work to achieve a mutual agreement between 136 countries. The international taxation landscape reached a turning point with a final political consensus being achieved at the beginning of October for the two-pillar solution proposed by the Organization for Economic Cooperation and Development (OECD).
The international taxation landscape reached a turning point with a final political consensus being achieved at the beginning of October.
While the most discussed Pillar Two of the OECD solution revolves around the global minimum tax of 15% for multinationals worldwide, Pillar One has a stricter application and targets, for now, multinationals with a global turnover above 20 billion euros (possibly decreasing to 10 billion in the future) and a profit before tax of above 10%.
The targeted global players operate not only in the digital and technology businesses, but also in traditional industry sectors and other technology-oriented organizations where digital transformation is key for growth.
An impact which will be closely monitored
Under the new regulations which will already be implemented in 2023, taxing rights of the largest and most profitable taxpayers would be reallocated to the countries where the customers and users of those taxpayers are located.
The reallocation of taxing rights to end market jurisdictions where goods or services are used or consumed will replace existing measures such as Digital Service taxes, encouraging a more streamlined approach and a higher degree of cooperation between countries.
Although this reallocation of profit applies to around 100 companies worldwide (due to the large thresholds established so far), these are the largest and most profitable companies in the market so competitors, clients, key stakeholders and the public all together will closely monitor the resulting impact.
No time to ‘wait and see’
To implement Pillar One rules, Luxembourg, similarly to the other countries, will have to quickly make changes to its domestic tax laws and treaty agreements.
To implement Pillar One rules, Luxembourg, similarly to the other countries, will have to quickly make changes to its domestic tax laws and treaty agreements.
Moreover, digital and technology focused multinationals will have to make systems changes in order to collect and produce the data that would be required to apply the new rules. New systems and processes will be needed to create the new tax reporting that would be required, which will trigger substantial costs. Given the tight timeline for implementation, there is no time to take a ‘wait and see’ approach.
What needs to be done now is assessing the preliminary impact of the new regulations on your organization structure, signal this impact to relevant stakeholders and start building an implementation plan until the rules become effective.