On October 8th, 2021, the Organisation for Economic Co-operation and Development (OECD) announced a historic agreement that could fundamentally reform the global tax system, known as the OECD agreement. The agreement seeks to prevent multinational corporations from shifting profits to low-tax countries, which has been a longstanding issue in the international tax system. In this article, we`ll take a closer look at what the OECD agreement entails and what it could mean for businesses and individuals around the world.

What is the OECD Agreement?

The OECD agreement is a two-pillar plan designed to balance taxing rights between countries and promote tax transparency. The first pillar involves reallocating taxing rights over a portion of profits from multinational enterprises (MNEs) to the countries where they have users or customers. The second pillar aims to set a global minimum tax rate to ensure that MNEs pay a minimum amount of taxes regardless of where they operate.

The OECD agreement was reached after years of negotiations and discussions between the OECD and over 130 countries. The agreement aims to create a more level playing field for businesses by preventing tax competition between countries, which can lead to a race to the bottom in terms of corporate tax rates. The OECD agreement also intends to ensure that MNEs pay taxes where they generate profits, rather than in tax havens or countries with low tax rates.

What are the Implications of the OECD Agreement?

The OECD agreement could have significant implications for businesses and individuals around the world. For MNEs, it will mean a potential increase in tax liability, as they will be required to pay more taxes in countries where they operate. This could also lead to changes in business models, such as reducing the use of tax havens and shifting more activities to countries where they have customers and users.

For countries, the OECD agreement would provide a more stable and predictable tax base, which is especially important in the wake of the COVID-19 pandemic. The agreement could also lead to increased revenues for developing countries, which have been disproportionately affected by profit-shifting and have struggled to attract investment from MNEs.

It`s worth noting that the OECD agreement is not yet a done deal. It still needs to be implemented by individual countries, which could take some time. However, the support from over 130 countries makes it more likely that it will be implemented widely and have a significant impact on the global tax system.

Conclusion

The OECD agreement represents a significant step forward in reforming the international tax system. While it could mean higher taxes for MNEs, it could also lead to a more level playing field for businesses and increased revenues for developing countries. As with any major international agreement, there are still uncertainties and challenges to navigate, but the OECD agreement is a promising development that could have positive implications for businesses and individuals around the world.