The world of international taxation has long been fraught with complexity and controversy. But recently, the OECD made major strides towards resolving some of the thorniest issues in this field with the release of its Pillar 1 and 2 proposals. These proposals, which are part of the OECD`s ongoing Base Erosion and Profit Shifting (BEPS) project, aim to modernize the global tax system and ensure that multinational companies pay their fair share of taxes.

So, what do Pillar 1 and 2 actually entail? Put simply, Pillar 1 deals with the allocation of taxing rights between countries, while Pillar 2 focuses on ensuring that companies pay a minimum level of tax regardless of where they operate. Here`s a closer look at each pillar and what they could mean for the international tax landscape.

Pillar 1

Pillar 1 is all about rejigging the way that profits are allocated between countries. Under the current system, companies are typically taxed based on where they are physically located, but this doesn`t always reflect the true value they generate. For example, a tech company might have a physical presence in, say, Ireland, but the bulk of its profits might come from users in the US.

Under Pillar 1, countries would be able to tax a portion of the profits generated by companies that don`t have a physical presence within their borders. This would apply only to companies with a global turnover of more than 20 billion euros and a profit margin of over 10%. The new rules would also include a mechanism to avoid double taxation and ensure that companies are not taxed more than 100% of their profits.

Pillar 2

While Pillar 1 deals with the allocation of taxing rights, Pillar 2 is all about creating a global minimum tax rate to ensure that countries aren`t engaging in a race to the bottom with their tax rates. This would be achieved through two mechanisms: the first is a global anti-base erosion rule, which would deny deductions for payments made to entities in low-tax jurisdictions. The second is a global anti-abuse rule, which would apply where the first rule does not.

The exact minimum tax rate is yet to be determined, but the OECD has suggested a rate of at least 12.5%. It`s worth noting that not all countries are on board with this proposal. For example, Ireland, which currently has one of the lowest corporate tax rates in Europe, has been vocal in its opposition.

What`s next?

The OECD`s proposals are not yet set in stone, and there are still numerous hurdles to overcome before they become global law. Not everyone is on board with the proposals, and there are concerns that certain countries might be able to game the system to their advantage. Nonetheless, these proposals represent a major step towards creating a fairer and more transparent international tax system.

For multinational companies, the changes could mean significant shifts in the way they do business. Companies will need to be more mindful of where they are generating profits and ensure that they have robust tax strategies in place to comply with the new rules. For countries, the changes could mean an influx of tax revenue that was previously going untaxed.

Overall, the OECD`s Pillar 1 and 2 proposals represent a significant shift in the way we think about international taxation. While there are still hurdles to overcome, the proposals are an important step towards creating a more equitable global tax system.