The Organization for Economic Cooperation and Development (OECD) recently proposed significant changes to global taxation. In an effort to minimize profit shifting, the Biden Administration and other governments are currently developing implementation agreements and strategies for tax levies on U.S. and foreign multinational companies. Tax avoidance occurs when multinational companies shift profits or seek low-tax jurisdictions or exploit different tax systems in order to minimize tax burdens.

The proposal is broken down into two separate components: Pillar 1 and Pillar 2. Pillar 1 focuses on where companies pay taxes, while Pillar 2 would establish a global minimum tax rate of 15%.

Pillar 1 would require a company to include its share of profits and pay taxes on those profits, regardless of its physical location. The end result would be companies paying more taxes to the country where its customer base is located, even if the company is not permanently established in that country. Digital advancement has eliminated the need for a physical presence in order for companies to reach many markets and more and more businesses are able to sell into various markets around the world without owing tax in those jurisdictions. According to an article on Tax Foundation, for companies with global revenues of more than 20 billion (U.S. $26.4 billion) and profitability above 10%, 25 percent of profits above 10 percent would be taxed using a formula based on where a companys customers are located. The changes outlined in the proposal by the OECD would reallocate taxing rights and expand a countrys authority to levy taxes on sales derived from consumers or digital users.

Pillar 2 introduces a new global minimum tax rate of 15%. The primary reason behind this proposal of change to the current tax law is to discourage large companies from finding lower tax jurisdictions in an effort to minimize or eliminate altogether their tax liabilities. (Wall Street Journal). Another highlight of the proposal is the top-up, which would require companies to pay the difference in taxes up to 15% to countries with lower tax rates to eliminate the advantage of shifting profits to a tax haven. The framework of the global tax plan would impose this minimum tax on companies in each country where they operate but would only apply to those entities with more than 750 million in global revenues.

While every tax revision has its pros and cons, I believe this proposal could be a step in the right direction. It could discourage large companies that utilize tax havens from shifting profits offshore and ensure they pay their share of taxes to the country in which revenues are earned. I also think that the U.S. will be the country most impacted by these changes due to its economic advantage. While the desire is to level the playing field and achieve fair taxation of multinational companies, the plan could potentially introduce issues such as additional tax complexity, slow global economic growth, and the discouragement of foreign investments.