Rethinking Global Taxation Policy; The Way Ahead?

The ubiquity of multinational enterprises in different parts of the globe has compelled the need for a holistic and coordinated international framework on taxation policy.

The widespread corporate scheme of tax avoidance and the reality of double taxation in cross border transactions have spurred collaborations among nations and leading tax organizations in respect of international taxation. Importantly, the ICC, in conjunction with the UN and the OECD have developed measures in arriving at international standards on global taxation in a concerted effort to combat profit shifting and base erosion.

Perhaps the biggest highlight in recent times in the world of international taxation is the concept of global minimum taxation. This is aptly reflected in Pillar two of the OECD two pillared framework on international taxation.

Pillar two applies to companies with a revenue margin of 750 million pounds. Pillar two is subdivided into four applicable rules. This article essentially seeks to explore the policy on global minimum taxation and weigh the prospects of its impact on a large corporate scale.

The first rule borders on domestic minimum tax where companies may claim first tax rights to profits of companies where they are currently taxed below minimum effective rate of 15 percent.

The Second rule touches on ‘Income Inclusion’ where the foreign income of foreign companies are included in their taxable income at the minimum rate of 15 percent. Otherwise, taxes would still be deemed owed in the home jurisdiction.

Third rule focuses on the undertaxed profits rule where countries may increase tax liability where tax rate falls short of the 15 percent minimum while the fourth rule deals with tax treaty frameworks enabling countries to tax payments and services earlier subjected to low tax rates at a 9 percent tax rate.

It is instructive to note, however that while the EU has unanimously agreed to implementing this tax policy, it is expected to begin in early 2024. Importantly, the workability of this policy is dependent on the acceptability by various nations. As at November, 2021, 137 nations had agreed to the OECD implementations. It’s noteworthy however, that Nigeria alongside other African countries were not receptive to the OECD recommendations and have opted out citing economic reasons and unrealistic standards for developing companies.

The future of taxation in the international space is poised to offer interesting developments. Whether or not the implementations would have on industry giants within the designated revenue thresholdis hard to project. However, the year 2024 offers new changes in the international tax community and world economies at large. Nigeria’s decision to opt out the OECD agenda citing economic concerns and a lack of a defined framework for developing companies is interesting. Whether or not the decision appears to be right depends on the success of her tax policy initiatives. Regardless, the impact of these initiatives will be revolutionary and would impact the economies of all nations whether they adopt them or not.

References

1 Daniel Bunn, Sean Bray, “The Latest On Global Tax Agreement; The EU Adopts Pillar Two” availablea at https://taxfoundation.org/global-tax-agreement/ accessed on Jan 11, 2023

2 Ndubuisi Francis, “Nigeria Opts Out Of Global Tax Deal, Cites Economic Impact”, available at https://www.google.com/amp/s/www.thisdaylive.com/index.php/2022/04/20/nigeria-opts-out-of-global-tax-deal-cites-economic-impact/amp/  accessed on Jan 11, 2023

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