Globalisation and digitalisation have facilitated legal tax avoidance by allowing multi-national
enterprises (MNEs) to shift profits to low or no tax jurisdictions. This has impacted domestic
tax revenues for G20 and OECD member countries. In response, the G20 and OECD member
countries jointly developed 15 pillars in 2016 to combat base erosion and profit shifting (BEPS)
to ensure MNEs are paying a ‘fair’ share of taxes wherever they do business [1].
The OECD has convinced 136 countries that comprises more than 90% of global GDP, including
the UK, to move forward on the joint statement signed earlier this summer to establish a
global minimum tax rate of 15%. This addresses the second of 15 pillars in the BEPS project.
The agreement will apply to MNEs with revenue above EUR 750 million. The measures also aim
to stabilise the international tax system and increase certainty for taxpayers and
administrators [2].
Traditionally, entities are taxed on their profits by the countries in which they reside and/or
where they have a permanent establishment. MNEs used this rule to establish themselves in
low or no tax jurisdictions and were careful to minimise any permanent establishments in
higher tax jurisdictions. This became strategically beneficial for digital companies that do not
require a physical presence. Such companies would earn revenues from markets in high tax
jurisdictions and were taxable in low to no tax jurisdictions. The BEPS project, including the
global minimum tax, aims to ensure a minimum amount of tax is paid on profits by
MNEs irrespective of where they reside or have a permanent establishment. Once legislated
within each member country, digital MNEs will have to re-evaluate their corporate
organisational structures and tax strategies.
[1] OECD, ‘International collaboration to end tax avoidance’
<https://www.oecd.org/tax/beps/> accessed 23 January 2022.
[2] OECD, ‘International community strikes a ground-breaking tax deal for the digital age’ (8
October 2021)
<https://www.oecd.org/tax/international-community-strikes-a-ground-breaking-tax-deal-for-
thedigitalage.htm#:~:text=Transfer%20pricing-,International%20community%20strikes%20a%20
ground%2Dbreaking%20tax%20deal%20for%20the,15%25%20tax%20rate%20from%202023>
accessed 23 January 2022.
