The practitioner’s guide to the OECD Multilateral Convention
January 18, 2024
Multinational firms leverage intangible assets in the rapidly changing digital landscape, posing challenges to outdated tax regulations. The OECD addresses this with a two-pillar solution, highlighting the crucial role of the Multilateral Convention in swiftly implementing the subject tax rule (STTR) to reshape global taxation for fairness and efficiency.
Challenges in international taxation amidst digital transformation
In the digital transformation era, multinational enterprises (MNEs) exploit intangible assets like intellectual property and data to reap substantial profits across borders without a physical presence. Outdated international tax rules struggle to cope with this virtual reality, enabling MNEs to circumvent taxes through “nexus” and “profit allocation” tactics.
The OECD’s Two Pillar solution
The Organisation for Economic Cooperation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has devised a Two Pillar Solution to address this. This initiative aims to establish global consistency and transparency, ensuring MNEs pay a minimum level of tax on their global profits, regardless of where they are generated.
The first pillar involves the establishment of a global minimum tax, requiring legislative changes in jurisdictions with tax rates below the minimum. The second pillar, Subject to Tax Rule (STTR), closes loopholes in intragroup payments, preventing profit shifting to low-tax jurisdictions.
Catalyst for fair taxation and global consistency
In October 2023, the OECD introduced the Multilateral Convention, a crucial STTR implementation tool. This convention allows source jurisdictions to “tax back” certain intra-group payments, promoting fair taxation and protecting the tax base of developing countries.
The STTR’s swift implementation is facilitated by the Multilateral Convention, offering a streamlined process through simultaneous tax law modifications across multiple nations. This unified approach becomes effective from 1 January, 2025, benefiting companies with a fiscal year aligning with the calendar year.
While the speedy implementation of the STTR is a positive step, it has progressed ahead of other Pillar Two rules. The benefits of the Multilateral Convention include:
- ensuring quick STTR implementation
- levelling the playing field for developing countries
- providing a fair framework for reclaiming taxing rights
In summary, the Multilateral Convention plays a crucial role in accelerating the implementation of STTR regulations, ensuring a fair and efficient global tax landscape for multinational enterprises.