A new Two-Pillar Solution from the OECD aims to address the tax challenges arising from the digitalisation of the economy. Aaron Lee and Joseph Lee from DBS Bank recently joined TMI’s Eleanor Hill in the TreasuryCast virtual studio to discuss these reforms and outline actions treasurers should be taking ahead of the 2023 implementation date.
The Organisation for Economic Co-operation and Development (OECD) and G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) announced in October 2021 that an agreement had been struck on a Two-Pillar Solution. This initiative sought to specifically address the digitalisation of the global economy and the various tax implications that this new dynamic world has created.
“The solution aims to address the concerns that many countries and authorities have regarding how companies in the digital economy have been able to exercise their reach across countries through multiple mechanisms,” says Aaron Lee, Head of Tax, Institutional Banking and International Centres. “For example, there’s concern about scale without mass, where a company can reach customers in their domestic country without having a footprint there. Other concerns are around generating value through network effects, and companies that place strong reliance on intangibles. The historic international tax architecture has always struggled with these kinds of issues.”
Indeed, international tax structures have traditionally focused on examining companies’ residence in a country and calculating tax based on that residence. The Two-Pillar Solution aims to ensure a fairer distribution of profits and taxing rights. It is also designed to limit the so-called ‘global race to the bottom’ when it comes to tax competition by setting a multilaterally agreed global minimum tax rate.