OECD Announces New Convention to Address Digital Tax Challenges

The Organisation for Economic Co-operation and Development (OECD) has released a multilateral convention aimed at restructuring taxation rights, enhancing tax predictability, and eliminating digital service taxes. This marks the international communitys progress toward the finalization of the Two-Pillar Solution for addressing tax challenges arising from digitalization and global economic dynamics.

The convention, known as the Multilateral Convention to Implement Amount A of Pillar One (MLC), reflects the consensus achieved among OECD/G20 framework members. It enables countries where multinational corporations sell products or services to levy taxes on a portion of the corporations profits, even if they have no physical presence or employees in those countries.

The MLC also abolishes digital service taxes, prevents double taxation, and improves international tax stability. The MLC will be presented to the G20 Finance Ministers and Central Bank Governors in the OECD Secretary-Generals Tax Report.

While there are differing views from certain jurisdictions, such as India, Brazil, and Colombia, countries are striving to resolve these differences. Under Pillar One, tax rights for approximately $200 billion USD in profits can be reallocated to market jurisdictions, resulting in an increase in global tax revenue of $17-32 billion USD.

Low- and middle-income countries are expected to receive the largest share of revenue. The Inclusive Framework has also made significant progress on Pillar Two through the Subject to Tax Rule (STTR), allowing source countries to impose additional taxes on cross-border payments made by related companies. This rule is part of the Two-Pillar Solution designed to protect the tax base of developing countries.

The Pillar Two draft introduces global minimum tax rules for large multinational corporations, with an effective tax rate of 15% in all jurisdictions. This global minimum tax is expected to generate additional revenue of up to $200 billion USD annually. The OECD has also published an Implementation Handbook for the Minimum Tax to assist governments in considering the implementation of this global minimum tax.