At the beginning of October 2021, 136 countries and jurisdictions supported the agreement of the Organization for Economic Co-operation and Development (OECD), also known as OECD, to introduce a minimum corporate tax of 15% in certain cases, which we will introduce you to in this publication.
The agreement is revolutionary because it is supported by more than half of the countries on the planet, representing more than 90% of the gross domestic product of humanity. The main motive of this ambitious project is to limit the artificial shrinking of the tax base and the transfer of profits (base erosion and profit shifting or BEPS), which leads to significant losses for economies.
The mind-boggling pace of digitization and globalization presupposes the need for rapid changes and adaptation of legislation in various spheres of life, incl. and in tax regulation. Tax regulations currently in place and designed for the needs of economies more than half a century ago cannot meet the modern realities of the digital age, which include increased online commerce, investments in blockchain technology and other intangible assets, and the continuous flow of data. in the online space. The foundation of most tax systems is the physical presence of a legal entity in the relevant territory in order to be subject to local taxation, but this concept is becoming increasingly difficult to apply in today’s rapidly developing world. It is this that helps large multinational companies to successfully plan and organize their actions so as to pay taxes as low as possible, which in turn stimulates the OECD to respond appropriately to this phenomenon.
OECD activities and initiatives culminating in the 15% minimum corporate tax agreement
The OECD was founded in 1948, and the key areas of the organization’s activity were the stimulation of economic progress and world trade. The main objectives of the OECD are to build stronger economies of member countries, improve efficiency, stimulate the market economic system, expand free trade and support the development of both industrialized and developing countries.
The organization’s focus has expanded over time and currently includes sectors and industries such as energy, transportation, education, financial markets, new technologies, and more. The OECD operates on the basis of decisions and agreements reached by consensus among countries.
The culmination of the long-term activity of the organization is the agreement reached in October of this year on the introduction of a corporate tax in the minimum amount of 15%. The aim of the agreement is a fairer distribution of taxes worldwide, with large multinational companies required to pay a minimum level of tax of 15% on income generated in each of the jurisdictions in which they operate. In addition, the agreement also aims to eliminate so-called “tax havens”, which in no way seeks to eliminate tax competition between countries. According to the organization, planning by large companies regarding tax rates in different parts of the world is harmful to the economies of countries, and for this reason the OECD has developed the agreement in two main pillars, which we will present to you in detail in the following lines.
The first pillar of the agreement on the introduction of a minimum corporate tax of 15% covers the redistribution of tax rights. This pillar will affect the distribution of profits and tax rights between countries in relation to the activities of the largest multinational companies, including the digital giants. This process will subsequently lead to the redistribution of certain tax rights of international enterprises from the countries in which they are established to the markets in which they carry out business activities and report profits, regardless of whether the companies have a physical presence in them or not. It is key to note that the first pillar only applies to companies with a worldwide annual turnover of more than €20 billion and a profit of more than 10%.
According to the organization itself, the minimum corporate tax of at least 15% will bring additional revenues to the countries that are part of the agreement, amounting to about 150 billion US dollars per year. Along with this positive aspect of the innovation, it is expected that over 125 billion dollars in tax revenue will be redirected to the countries in which the large international corporations actually carried out the relevant activities subject to taxation.
Establishing a global anti-base erosion mechanism – the second pillar of the 15% minimum corporate tax agreement
The second pillar of the agreement concerns the creation of a global mechanism against the erosion of the tax base. This pillar seeks to introduce a minimum level of competition in corporate income tax by introducing a global minimum corporate tax rate that countries can use to protect their tax bases. The minimum corporate tax does not oblige countries to set their rates at this rate, but it gives other countries the right to apply an additional tax on the income of companies established in a country where the rate is below 15%. In addition to the huge revenues expected to accrue as a result of the implementation of a minimum tax rate of 15%, additional benefits will also result from the stabilization of the international tax system and increased tax certainty for taxpayers and tax administrations. The minimum tax rate of 15% will apply to the profits of international enterprises with a turnover of at least EUR 750 million per year.
In addition to all of the above, it is important to note that on December 20, 2021, Global Base Erosion (GloBE) rules were published, outlining the scope and setting out the operational regulations and the definitions used in the GloBE Rules. These rules are intended to be applied as part of the general approach and to be introduced into the domestic legislation of the parties to the agreement from 2022 onwards. To ensure that the new rules can be administered effectively and efficiently, the OECD will provide capacity-building support to developing countries in this area. This process will be carried out in partnership with regional organizations (such as the EU) and development banks, as well as through large-scale technical assistance programmes.
Impact and effects for Bulgaria of an agreement on the introduction of a minimum corporate tax of 15%
Bulgaria (a candidate for OECD membership) became part of the 136 countries that supported this initiative. The countries that supported the agreement have no obligation to apply the minimum rate of 15% outside of the hypotheses described in it, accordingly Bulgaria is not obliged to increase the corporate tax rate, which is currently 10% (the lowest in the EU). Against the background of this international initiative, the raising of the corporate tax rate in Bulgaria, whose low rate is the main factor attracting foreign investments to Bulgaria, is actively being commented on in the public space.
However, the activity on the topic concerning the amount of profit tax in our country should also be an indication for Bulgaria to direct its efforts to other solutions with a view to attracting more foreign investments. Possibilities in this regard are the reduction of the administrative burden for businesses, the stimulation of the qualification and training of students, the digitization of administrative services and others.
The agreement cited in this article should enter into force in the countries that supported it in 2023, and the dynamics of this process clearly demonstrate that Bulgaria can no longer rely solely on low tax rates to be an attractive place for investment and business development.