BEPS 2.0 and the global minimum tax

The Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 initiative will have a significant impact on the global tax landscape. The new tax rules represent a historic shift in international taxation, with more than 140 countries achieving a consensus on a minimum level of tax. Kathy Lim, Partner at KPMG, Global Transfer Pricing Services, and Muriel Narmon, Executive Director at KPMG, Lead for Tax Accounting & Reporting, discuss the implications of the Global Anti-Base Erosion (GloBE) rules (Pillar 2) for large corporations.

BEPS 2.0 is a response to the increasing digitalization and globalization of businesses. "For the last century, the international tax system has focused on taxing profits where groups have a physical presence," explains Kathy. “With changes in business models, supply chains, and how groups generate revenue in a digitalized world, there is a clear need to update the global tax system.”

“The consensus reached by more than 140 countries is an extremely significant achievement, representing over 95% of global GDP,” says Muriel. “Previously, countries were often in a race to the bottom to attract new investors, using low tax regimes and attractive tax incentives. With the upcoming global minimum tax rules, the playing field for tax optimization is shifting. Companies need to ensure that they have sufficient economic activity and substance in each jurisdiction to justify their tax strategies – now more than ever.”

“The global minimum tax requires companies with consolidated revenues of €750 million or more to pay a minimum effective tax of 15% in each jurisdiction that they operate in,” says Kathy. “The OECD has estimated that the new rules could result in €150 billion of additional tax revenues worldwide, which could support recovery from the COVID-19 pandemic. Separately, the requirement for companies to pay a minimum tax is also a response to society’s call for companies to demonstrate greater corporate social responsibility and ensure even greater tax transparency.”

“This also means that tax incentives and low tax rates will no longer be the main driver for where companies choose to operate or invest in,” says Muriel. “Countries will have to seek other ways to attract investors.”

“After assessing the impact of the global minimum tax, this is an opportunity for groups to re-evaluate their business models and structures to reduce their tax risks and exposure,” says Kathy. “In this regard, companies should also be aware that public opinion demands transparency and fair taxation. Business models must reflect business needs and reality.  Companies cannot afford to let tax efficiency be the sole driver of their business direction.”