The Organization for Economic Cooperation and Development (OECD) has announced that 138 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), including Vietnam and representing over 90 per cent of global GDP, agreed on July 11 with an Outcome Statement recognizing the significant progress made and allowing countries and jurisdictions to move forward with historic, major reform of the international tax system.
The Two‐Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy will ensure a fairer distribution of profits and taxing rights among countries and jurisdictions with respect to the world’s largest Multinational Enterprises (MNEs).
The Outcome Statement agreed at the 15th Meeting of the Inclusive Framework follows 20 months of intense technical negotiations by delegates to continue the work to implement the Two Pillar Solution. It reflects collaboration and compromise among all jurisdictions - small and large, developing and developed - during negotiations by Inclusive Framework members since October 2021.
The Outcome Statement summarizes the package of deliverables developed by the Inclusive Framework to address the remaining elements of the Two‐Pillar Solution:
- A text of a Multilateral Convention (MLC) developed by the Inclusive Framework, which allows jurisdictions to reallocate and exercise a domestic taxing right over a portion of MNE residual profits. The Inclusive Framework will publish the text of the MLC once it has been prepared for signature, upon resolution of a small number of specific items, as a few jurisdictions have expressed concerns with some specific items in the MLC.
- A proposed framework for the simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities (Amount B of Pillar One), where input from stakeholders is requested on certain aspects prior to finalization.
- The Subject-to-Tax Rule (STTR) together with its implementation framework, will enable developing countries to update bilateral tax treaties to “tax back” income on certain intra-group income where such income is subject to low or nominal taxation in the other jurisdiction.
- A comprehensive action plan will be prepared by the OECD to support the swift and coordinated implementation of the Two-Pillar Solution, coordinating with regional and international organizations.
In a significant development since October 2021, 138 countries and jurisdictions also agreed in the Outcome Statement to refrain from imposing newly-enacted digital services taxes or relevant similar measures on any company before December 31, 2024, or the entry into force of the MLC if earlier, provided the signing of the MLC has made sufficient progress by the end of the year. This commitment is made in recognition of the progress made to date and the need to prevent disruption or delay of the ratification of the MLC.
According to Mr. Mathias Cormann, the Secretary-General of the OECD, the Two-Pillar Solution will provide stability for the international tax system, making it fairer and work better in an increasingly digitalized and globalized world economy. “We have all been working intensively on the technical details and on the implementation arrangements that are necessary to make the Two-Pillar Solution a reality,” he said.
“The agreement reached yesterday proves that despite the challenges and compromises along the way, multilateral dialogue works and can deliver results to tackle shared challenges requiring shared solutions,” he went on. “This work is critical to governments and our economies, ultimately, to be able to raise the necessary revenue to fund the essential public goods and services for their citizens.”
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