On June 1, 2021, the Organisation for Economic Co-operation and Development (OECD) announced that 130 countries of the Inclusive Framework of Base Erosion Profit Shifting (BEPS) agreed to a new Action Plan 1 of the BEPS Project to reform international taxation rules.

These 130 countries represent 90% of the world’s GDP, including countries such as China, the United States, France, England, Germany, Japan and Mexico.

The participants agreed on a final deadline by October to finalize the details and technical elements of the agreement, as well as to bring on board the 9 countries that are not convinced, such as Ireland, Hungary, Peru, Kenya, among others.

The Deputy Secretary of Finance and Public Credit, Gabriel Yorio, stated the following: “It is feasible that the minimum global rate will remain at 15%, which is estimated to obtain a global sum of 500 billion dollars. For Mexico, this would represent at least 30 billion pesos.

The reforms announced by the OECD refer to two new pillars in the rules of international taxation.

Pillar One

Reference is made to a relocation of the rights to tax Multinational Enterprises (MNEs) to the markets where these companies carry out their activities (source), regardless of whether the companies have a branch or permanent establishment.

This pillar applies specifically to MNEs (except for the extractive industry and financial services) that produce revenues greater than 20 billion euros and yield rates higher than 10%.

It is intended that a portion of the MNE’s income will be taxable in the country where the market is located when it has earned at least 1 million euros in that jurisdiction, or 250 thousand euros if the country has a Gross Domestic Product (GDP) below 40 billion euros.

Likewise, it is considered that 20-30% of the profit above the 10% revenue, in this case, the residual profit, will be taxable in the source country or countries in proportion to the income obtained in each one of them.

In other words, pillar one consists in making MNEs pay Income Tax in the country in which they operate and earn benefits, ensuring a more equitable distribution of profits and taxation rights between countries.

Pillar Two

Pillar two mentions the global minimum tax, thus halting the competition between countries to offer decreasing tax rates, such as tax havens or REFIPRES.

This Pillar will be applicable to MNEs with income over 750 million euros. The Global Anti-Base Erosion Proposal (GloBE) will seek to develop a coordinated approach to address the risks arising from legislation that allows MNEs to shift profits to jurisdictions where they are not taxed or are taxed at very low rates.

It is estimated that this new minimum base will generate around $150 billion in additional tax income on an annual basis.

Possible Complications

There are potential challenges to the final enactment of this declaration as President Joe Biden does not count on the support of Republicans, who are unwilling to make any tax changes.

In addition, organizations such as OXFAM International predict that the poorest countries will collect less than 3% of the new tax income, despite the fact that they make up one third of the world’s population, in contrast to the fact that 66% of the new income will be collected by the European Union and the G7 alone.

Final stages

It is important to mention that on July 9 and 10, the G20 will meet in Italy to give more details about this agreement, but no major changes are expected since the G20 members are part of the 130 countries that agreed to the two pillars.

This declaration is expected to come into force in 2023, allowing some of 2021 and all of 2022 for countries to make the relevant changes to adapt to the two pillars.

Therefore, we believe it is of utmost importance to keep an eye on the next G20 meeting in order to learn about and implement the necessary changes in the MNEs.

We suggest you consult the following website for more information: https://www.oecd.org/tax/beps/beps-actions/action1/

We are at your service for any questions or clarification in this regard.