The new transnational rules for the taxation of international companies presented by the Organization for Economic Co-operation and Development (OECD) will be unprecedented in history. Secretary of State Alexei Sazanov, Deputy Minister of Finance, stated this at the Moscow Financial Forum.
Joining Russia’s global initiative will help overcome “the most significant and actively used tools for tax optimization”, which will bring “tens of millions of rubles a year” to Russia’s budget, the deputy minister said. “It simply came to our notice then. We have a lot of domestic consumption, a lot of imports, ”he points out. “Pillar1 and Pillar2 are great.”
“Pilar1, in our opinion, is a breakthrough in taxation, the equivalent of a manned space flight. The tax base will be determined at the transnational level. There has never been such a precedent in tax history, ”Sazanov said.
The Pilar1 mechanism allows each country to receive taxes in proportion to the level of consumption of products and services of international business groups (IGCs). The need to establish a transnational mechanism in recent decades has led to the emergence of international business groups with large financial resources, using tax optimization tools that are difficult for countries ’tax administrations alone to combat. Sazanov explained that if a country’s tax service “tightens its screws,” an international business group could move to another jurisdiction.
Pillar2 is also a kind of advancement, Sazanov continued. “For the first time, local tax administrations will be able to tax the profits of a joint venture not only in the country where the parent company is located, but also in the entire value chain.” the deputy minister explained. “If the parent company finds that the tax rate is below 15% as a result of the tax optimization, then the tax administration of the parent company will increase the effective tax rate to 15%. This is also a kind of precedent. ”
On July 1, the OECD presented the common position of 131 countries, including Russia, on the vision of global tax reform. The rules of the game are expected to change in two ways. Pillar 1 will tax international business groups with revenues of more than € 20 billion in countries that receive revenue from the local public but do not pay taxes. Initially, this measure was intended to be extended mainly to IT companies, but for publication, the OECD decided to extend it to any international business group (IGC). In fact, column 1 shows a fairer distribution of tax flows where MGK makes money.
Column 2 implies a harmonization of the tax rate between the countries at a minimum level of 15%. In particular, if the effective tax rate in the individual jurisdictions represented by MGK is lower than the minimum tax, then an additional fee will be created to compensate for this difference. As a general rule, it is paid in the country of registration of the parent company. In addition, the second pillar aims to equalize the differences in retention rates in international horn groups.
A more detailed draft of the OECD reform is due in October. The new rules are expected to be implemented in 2023.