New International Corporate Tax framework

20 September, 2021

On 1 July 2021, 130 countries (including the Isle of Man) from the pool of 139 members of the OECD Inclusive Framework on Base Erosion and Profit Shifting committed to fundamental changes to the international corporate tax system.

A statement released by the OECD confirmed a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. The statement was very general with respect to some of the key design features of the two Pillars and so we can expect a lot more of the detail to follow, potentially in October/November.

The key features are:

Under Pillar One, a formulaic share of the consolidated profit of a multinational enterprise will be allocated to markets based on where sales arise; and
Under Pillar Two, the members have agreed to enact a jurisdictional-level minimum tax system with a minimum effective tax rate of at least 15%.

Pillar One and Two represent a major overhaul of the international corporate tax system, with the application of Pillar One to the residual profit of 100 corporate groups constituting some of the key tax factors for large Multinational enterprises (MNEs) to consider in their scenario planning. However, it also means that a substantial amount of cross border income could remain unaffected.

An implementation plan together with remaining issues will be finalised by October 2021, although it is likely that even then details will remain to be developed. Implementation is due in 2023 according to the Statement. However, the suggested timeline seems optimistic and, perhaps, politically driven.

There remains broader uncertainty around the effective implementation of the agreement. While the commitment of the US Administration to the project is beyond doubt, their ability to secure Congressional support before other countries actually move ahead with national legislation to implement the proposed changes is less clear.

There are also other hurdles to overcome, such as securing the support of all EU member states to unanimously pass EU directives implementing the new framework.

On a related issue, the OECD Statement has little detail on the repeal of Digital Services Taxes (‘DSTs’) which have been implemented by a number of countries, including the UK, but it does cover coordination, without being clear on what this means.

In summary

In summary, while this is an important step on the road to a multilateral agreement, it is by no means the finished product and there are still some significant uncertainties on the final shape, and timing of any such agreement.

Until there is more detail, it is impossible to say what this means for the Isle of Man. The statement will inevitably form an important reference point in the Isle of Man Government's on-going development of a Long-term Future Economic Strategy.

To discuss the challenges raised, please get in touch. For information about how we can help your business, please visit our Tax services page.