Following the publication of the “Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy” (see our respective PwC blog post on 3 February 2020) OECD provided an update on the analysis of the expected possible economic impact of Pillar 1 and Pillar 2 proposals.
The update, in the form of a webcast and accompanying slides, outlines the initial assessment of the OECD on the impact of the proposed fundamental revisions to international taxation principles on the amount of corporate income tax (CIT) revenues collected globally as well as an estimate on the expected increase the global estimated average tax rates (EATRs).
Estimated financial impact on economies
Overall, the OECD currently estimates Pilar 1 and 2 proposals to result in a 4% increase of globally collected CIT revenues, i.e. approx. USD 100 billion annually. Based on the existing economic analysis performed by the OECD, it is expected that overall CIT revenue gains will be realized by high, middle as well as low-income.
The latest economic analysis estimates by the OECD foresee the overall impact of the Pillar 1 and 2 reforms to result in a small tax revenue gain for most economies. The low and middle-income economies would on average realize a higher additional CIT revenue as compared to more advanced ones. Notably, in case of the jurisdictions currently characterized as investment hubs, a drop in CIT revenues is expected under the OECD economic analysis estimations.
From an overall perspective, a proportionately much larger share of the additional CIT revenues generated as a result of BEPS 2.0 reforms is expected to be driven by Pillar 2 (Minimum tax rate) as compared to Pillar 1 (New taxing right).
Impact on effective corporate tax rates of affected multinational companies (MNEs)
As a consequence of the implementation of the Pillar 1 and 2 rules, an increase in the effective average tax rates (EATRs) is to be expected for taxpayers within the scope of the new rules. The economic analysis of the OECD currently estimates the impact on the EATRs of taxpayers in investment hub jurisdictions to increase by approx. 2%. For MNEs in high, middle, as well as low-income jurisdictions the estimated increase in EATRs is currently estimated to be slightly above the 0.5% mark.
Similar to the estimates of overall CIT revenue increase, the impact on the EATRs is primarily driven by the Pillar 2 global minimum tax rate proposal. The economic analysis of the OECD covering the Pillar 2 revenue effects is based on several scenarios, which factor in the impact of the reform on the behavioral changes of the taxpayers as well as possible corporate tax rate adjustments by the jurisdictions themselves.
OECD Economic analysis parameters
Beyond the estimated CIT revenue and EATR impacts, the economic and impact analysis results presented by the OECD provided some interesting insights on how the organization approaches this topic. The current analysis is based on data from various governmental and commercial sources, covering more than 200 jurisdictions and more than 27’000 MNE groups. Overall, more than half of the expected additional CIT revenues to be collected will come from approx. 100 MNEs.
The current estimates by the OECD focus on the impact of Pillar 1 Amount A (new taxing right based on formulaic profit apportionment) only, with no estimation on the expected impact of Amount B (minimum remuneration for baseline marketing and distribution activities) as well as Pillar 2.
In addition, the marginal comments by the OECD on the parameters used by the OECD for the economic and impact analysis of Pillar 1 Amount A and Pillar 2 provide interesting insight. For Pillar 1 Amount A, a deemed residual profit threshold of 10% was used, with 20% value applied for re-allocating these profits to market jurisdictions. In case of Pillar 2 impact simulations, a minimum tax rate of 12.5% was applied. The economic analysis of the OECD excluded MNEs operating in commodities and financial sectors.
Key Take-Aways
The initial economic impact estimations and parameters used by the OECD provide tax payers and jurisdictions with a first indication of the possible impact of the discussed reforms. It should be noted, that the current analysis is based on the draft architecture for Pillars 1 and 2, which is not yet final and will require political consensus. All stakeholders will continue to closely monitor the developments in this area and can already compare their own impact simulations with the initial findings of the OECD.
