1st March 2022
For recruitment agencies placing professionals internationally, keeping abreast of international tax laws is vital – and huge changes are currently on the horizon for those with interests across the EU.
Following a landmark agreement on global tax reform, which was brokered by the Organisation for Economic Co-operation and Development, the world is currently working towards the effective implementation of a global minimum corporate income tax rate of 15 per cent for multinational enterprises. This is outlined in ‘Pillar Two’ of the OECD’s pillar solution to tax reform, which is also referred to as the Global Anti-Base Erosion (“GloBE”) proposal. ‘Pillar One’, meanwhile, is designed to ensure fairer taxing rights amid an increasingly global – and digitised – business environment.
But what exactly are the tax pillars? And why are they being considered? Here’s what you need to know about the new European tax for recruiters.
The background
In October 2021, a two-pillar solution to address the tax challenges arising from digitalisation and globalisation of the economy was endorsed by 137 members of the OECD Inclusive Framework. Work on the implementation of the two-pillar plan is now well underway.
Intend to address perceived challenges to long-standing international taxation principles, if implemented, these rules will significantly impact the taxation of multinational groups, introducing new complexity to international taxation and nullifying the benefit of tax incentive regimes employed by many countries to attract foreign investment.
Pillar One
Pillar One of the agreements is a significant departure from the historic standard for international tax rules, which largely require a physical presence in a country before that country has a right to tax, thereby addressing the tax challenges raised by digitalisation.
Pillar One will ensure a fairer distribution of profits and taxing rights among countries concerning the largest MNEs, including digital companies. It will re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms there has a physical presence there. Under Pillar One, taxing rights on more than $125 billion of profit are expected to be reallocated to market jurisdictions each year.
Pillar Two
Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases. The global minimum corporate income tax under Pillar Two – with a minimum rate of 15% – is estimated to generate around $150 billion in additional global tax revenues annually.
Pillar Two includes two proposals that operate almost independently of each other:
- A global anti-base erosion regime (GloBE rules) applies through an income inclusion rule and an undertaxed payments rule with support from a switchover rule as required; and
- A minimum level of tax on certain payments between connected parties, which are deemed as having a heightened base eroding potential (subject to tax rule (STTR)).
The interaction between the two is that the top-up tax imposed under the STTR is taken into consideration to calculate the effective tax rate under GloBe rules. Therefore, the STTR operates in priority to GloBe rules.
Impact in Europe
In December last year, the European Commission proposed a draft directive to implement the OECD inclusive framework model rules in a ‘coherent and consistent way’ across EU member states, meaning that recruiters with operations on the continent may be impacted imminently.
The proposal delivers on the EU’s pledge to move ‘extremely swiftly’ and be among the first to implement the political consensus deriving from the OECD/G20 inclusive framework on Pillar Two in particular.
The importance of keeping on top of European tax for recruiters
It is anticipated that the OECD will adopt and publish a commentary on OECD model rules during the first quarter of 2022, with further detail expected throughout this year. Pillar One and Pillar Two rules will likely begin to apply in 2023. Therefore, you must keep your ear to the ground to ensure that you keep up-to-date with incoming rules and legislation.
Operating globally can be extremely rewarding, but it is not without its challenges – and you have a responsibility to ensure that your business operations, and any contractors you place with international firms, are not inadvertently on the wrong side of local laws. If you are struggling to keep abreast of international tax changes, talk to 6CATSPRO to ensure you are always operating compliantly.
