Global Tax Overhaul: Major Changes Ahead for Multinational Corporations

Imagine you own a huge company that operates all over the world. You're selling products in various countries, but your main office and a lot of your workers are in just one country. Traditionally, you'd pay most of your taxes in the country where your company is based. But recently, there's been a big change in how taxes work for multinational companies like yours.

In October 2021, 130 countries got together under an organization called the OECD (Organisation for Economic Co-Operation and Development) and decided to change the tax rules.

Now, your company will have to pay more taxes in the countries where your customers are, rather than just where your company is based or where your employees work. They also agreed on a minimum global tax rate of 15% for big companies. This means if you were paying less than that in some places, now you'll have to pay at least 15%.

The Pillars

This new tax plan is split into two parts, called Pillars.

Pillar One is about changing where the taxes are paid. It's estimated that this change will affect about $200 billion in profits. The second part, Pillar Two, is about the global minimum tax rate, which could raise tax revenues by around $220 billion globally.

There have been some disagreements and delays in getting these new rules into action. For Pillar One, the detailed rules were only published in October 2023, and Pillar Two will start to be used in 2024 by the countries that adopt it first.

Pillar One has a special rule for really big companies, those making more than €20 billion in sales and with a profit margin above 10%. These companies will have to pay taxes in the places where they have customers, based on a certain portion of their profits. This is a big deal, especially for U.S. companies, which make up a large chunk of these multinational giants. The U.S. might lose some tax money because of this, but it's expected that it might balance out if they also tax foreign companies selling in the U.S.

Pillar Two, the global minimum tax, is a bit more complicated. It has several rules designed to make sure that these big companies pay at least a 15% tax rate on their profits, no matter where they make their money. This part relies a lot on the companies' financial records and is supposed to prevent companies from avoiding taxes by moving their profits to countries with lower tax rates.

What's changed?

These new tax rules are a big shift from how things were done before. They're supposed to make it fairer and stop countries from competing too much to offer the lowest tax rates to attract big companies. The European Union has already agreed to put these rules into practice, and they're planning to start in 2024. However, not every country is moving at the same speed, and some, like the U.S., haven't fully committed to these changes yet.

This is a huge deal in the world of international business. It's all about making sure big companies pay their fair share of taxes in the countries where they operate and sell their products, rather than just where they're based. This could mean some big changes for these companies and the countries involved.

Concerned? 

If you have questions or concerns about this change, please give us a call.