130 countries join the OECD tax deal

On 1 July 2021, 130 countries and jurisdictions backed the OECD framework to reform international taxation. It included a global minimum tax and new rules for allocating the profits of multinationals between countries, a step beyond the political commitment reached weeks earlier at the G7. Moving from a handful of countries to a hundred and thirty changes the scale of the project.

The backing of so many countries gave a different strength to an idea that until recently seemed remote. For groups with an international presence, it meant that the debate was no longer theoretical but a reality to prepare for. For many executives and owners, the subject thus moved from the list of curiosities to the agenda of decisions. For other companies, it was a signal of where taxation is heading: more coordination between authorities, more transparency and less room for structures with no economic substance.

What the OECD framework is

The OECD is an international organisation that brings together advanced economies and serves as a forum for coordinating policies. Its tax framework rested on two pieces: a global minimum tax and new rules on which country taxes each part of a multinational’s profits. Until then, each State taxed in its own way, which made it easier for large companies to declare profits where taxation was lower. It is that diversity of rules that the reform sought to bring into order with common criteria.

Broad backing matters because rules of this kind only work if enough countries take part. If a few apply a minimum and others do not, companies can move their activity to the latter. That is why backing from a hundred and thirty countries strengthens the chances that the reform will be applied effectively. An agreement with many signatories also reduces the risk of companies being caught between contradictory systems.

An agreement still to be closed

The final agreement would come in October. Until then, technical details remained to be polished, and effective application would depend on each country adapting its legislation. For that reason, what was approved in July had to be understood as a framework, not as a rule already enforceable.

The timetable for application is as relevant as the content of the agreement. A rule that applies in a year or two allows calm planning, whereas one that takes effect immediately forces a quick reaction. Until there are firm dates, the companies concerned live in a zone of uncertainty that is best managed with foresight, without waiting for everything to be written down. Planning on reasonable assumptions is better than waiting for certainties that will take time to arrive.

What to do in the meantime

For groups with an international presence, it was the moment to quantify the impact before the rule came into force. It is worth identifying which entities could be affected, estimating how the tax burden would change and reviewing documentation and reporting processes. Doing so in advance avoids hasty decisions when the time comes.

Tax advisers can help organise this work in phases: first a map of the structure, then an estimate of the effect under different scenarios and, finally, an adaptation plan with a timetable. Each phase should have an owner and a date, so that the work does not get shelved. Even companies not directly affected may benefit from understanding the framework, because the underlying principle, that taxation should follow real activity, extends to other rules. Understanding it avoids surprises in future legislative reviews and in dealings with the authorities.

Anticipating the impact makes it possible to decide with composure.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.