On October 13, 2021, the G20 Finance Ministers and Central Bank Governors issued a Communiqué formally endorsing the political agreement reached by 136 countries of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) on a two-pillar framework to dramatically change the taxation of multinational enterprises (MNEs). The  Communiqué calls on the IF “to swiftly develop the model rules and multilateral instruments. . .with a view to ensure that the new rules will come into effect at global level in 2023.” The Finance Ministers’ endorsement is an intermediate step concluded in anticipation of the G20’s full approval of the agreement to be considered at the next G20 meeting in Rome at the end of October.

As discussed in our recent Legal Update, the IF had announced the landmark 136-country agreement just five days earlier on October 8, 2021. Importantly, the agreement would reallocate $125 billion of annual profit to countries that would not otherwise tax such profits under current international tax norms and require that all profits be subject to a global minimum tax rate of 15%. To reallocate such profits, the agreement relies in large part on a new formulary taxing right called “Amount A.” Specifically, Amount A reallocates 25% of the residual profits (i.e., profits in excess of a 10% margin) of approximately 100 of the world’s largest and most profitable MNEs from the jurisdictions that currently earn the residual profits to the MNE’s market jurisdictions. While Amount A is an explicitly non-arm’s length allocation, it operates as an overlay rather than an override to the existing transfer pricing rules. This will likely create complex interactions between the new and existing rules that will put additional pressure on existing transfer pricing methodologies and create the potential for double taxation. This in turn will put added pressure on the new multilateral mandatory dispute resolution mechanism that the agreement contemplates will be put in place to resolve Amount A-related disputes.

Click here for the complete Legal Update.

The post G20 Finance Ministers Endorse Landmark OECD/G20 Inclusive Framework Agreement: New Rules Likely to Put Added Pressure on Existing Transfer Pricing Rules appeared first on Best Methods.