Biggest Tax News in a Century: An International Corporate Minimum Tax

Marco Iampieri B.A., JD, M.B.A.

The tax challenges arising from globalization and digitization have led to the most significant tax news in a century:  a global minimum tax on corporations.  This was the big tax news introduced at the G7 meeting on June 5, 2021.  It is a serious problem that gives corporations the ability to shift profits away from the jurisdictions in which those profits were earned, thereby eroding the tax base. This article will address the basics of those changes.

The Organization of Economic Development (“OECD”) greatly influences tax laws for participating countries, including Canada. In London, England on June 5, 2021, the Finance Minister and Central Bank Governors of the G7, joined by the Heads of the International Monetary Fund, the World Bank Group, the OECD, the Eurogroup and the Financial Stability Board, among other things, agreed to strongly support the efforts underway through the G20/OECD Inclusive Framework to address the tax challenges arising from globalization and the digitalisation of the economy and to adopt a global minimum tax.

The Tax Problem (“Tax Problem”)

The OECD desires to limit the ability of multinational enterprises (“MNE”) to erode the tax base of countries in which revenue has been earned by legally shifting the revenue to an affiliated entity in a lower tax jurisdiction.

International tax rules are based on the traditional ways of carrying on business though a ‘permanent establishment’ and most of the tax rules were designed more than a century ago. Weaknesses in the current rules create opportunities for base erosion and profit shifting. Base erosion and profit shifting is achieved, among other ways, by incorporating companies in various low-tax jurisdictions and legally shifting revenue earned in one jurisdictional ‘source’ to another.

The Solution: Pillar One and Pillar Two of the OECD’s Blueprint

Pillar One of the OECD’s Blueprint to address the Tax Problem is anticipated to apply to large multinationals engaged mainly on the digital world (Facebook, Google, Amazon, etc.). The key elements of Pillar One can be grouped into three components:

1) A new taxing right for market jurisdictions over a share of residual profit calculated at an MNE group level

2) A fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction.

3) Processes to improve tax certainty through effective dispute prevention and resolution mechanisms.

Pillar One aims to ensure that, among other things, the legal mechanisms are available for countries to adopt into their legislation, allowing countries to have taxing rights and earn tax revenue that would otherwise be unavailable because of MNE tax planning.

Pillar Two of the OECD’s Blueprint to address the Tax Problem is focused on a global minimum tax of at least 15% intended to address remaining issues of the Tax Problem. The rules underlying Pillar Two ensure that all large internationally operating businesses pay at least a minimum level of tax. Pillar Two also includes rules with a right to “tax back” where other jurisdiction have not exercised their primary taxing rights, or the payment is otherwise subject to low levels of effective taxation.

Essentially, Pillar Two allows countries to ignore the legal form of the MNE and treat all separately incorporated companies in various jurisdictions as one taxable entity.

Canadian Concerns

Canadian jurisprudence has routinely held that OECD documents are not binding on the judiciary, although they can be persuasive. Pillar One and Pillar Two are not law in Canada, and not binding on the Canadian Tax Court judiciary, until they are approved by Parliament and have received Royal Assent.

The Bottom Line for Advisors: it’s important for advisors to be aware that there are tax implications of this new proposed agreement.  Specifically, it’s a good time for advisors to take advantage of a window of opportunity to implement international tax plans before it closes and these changes become law in Canada.  

Additional educational resources:   It is also an opportune time to gain extensive knowledge and earn new credentials in cross border taxation with the Knowledge Bureau Certificate course: Canada-US Cross Border Taxation.  Summer school registration now available until June 30 with a special tuition offer for new students! Use code 21SUMMER when you enrol!