Last week’s landmark agreement, shepherded by the OECD, and signed by over 130 countries, to reform the international tax rules will have significant implications for multinationals (MNEs), Government and tax authorities.
That agreement sets out the general principles for:
- Where tax is paid by MNEs (called “Pillar One”) to allocate greater taxing rights to so-called “market jurisdictions” (where the consumers are based).
- How much tax is paid by MNEs (called “Pillar Two”), through agreeing a minimum global rate of taxation of at least 15 percent (effectively putting a floor for tax rate competition).
Much of the detail and how the changes will apply – most will require either changes to domestic law or tax treaties – remains to be finalised. The proposed timeline is for countries to implement the necessary changes in 2022 for application in 2023. That is ambitious.
For New Zealand:
- The key change under Pillar One – the allocation of residual profit ("Amount A") - given our minimal share of the global consumer market, is unlikely to raise significant amounts of tax for New Zealand. The other parts of Pillar One are likely to have a greater impact on New Zealand based MNEs as, hopefully, clearer taxing rights are allocated for normal marketing and distribution activities.
- The Pillar Two proposals are the most contentious, with some countries not agreeing to their application. The complexity of operationalising these rules, the need for both domestic and international agreement on their application, and removal of existing unilateral measures (such as digital services taxes) will make this more challenging. The hope is that the rules will be as simple as possible rather than trying to achieve a perfect result.
The New Zealand Government, while welcoming the agreement, is yet to release its full position. However, we expect as with other international tax measures that New Zealand will implement the agreement. We expect that will mean that a digital service tax, consulted on in 2019, does not proceed. That will hopefully become clearer in the coming weeks.
For more detail on the Pillar One and Pillar Two agreement, please click here.