On October 8, 2021, the Organisation for Economic Cooperation and Development (OECD) announced that 136 countries, including Canada, reached an agreement to address tax challenges related to multinational enterprises (MNEs) and the digitalization and globalization of the economy.
The Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy contains two frameworks (Pillar One and Pillar Two). Pillar One is aimed at reallocating certain taxing rights over approximately 100 of the largest and most profitable MNEs to the jurisdictions where the customers and users of the MNEs are located. Pillar Two is aimed at imposing a global minimum corporate tax of 15% on MNEs with annual revenue over 750 million euros.
In a related press release, Canada’s Department of Finance described the Two Pillars as follows:
Pillar One of the OECD agreement will ensure that the largest and most profitable global corporations, including large digital corporations, pay a fair share of tax in the jurisdiction where their users and customer are located.
Pillar Two of the OECD agreement will ensure that multinational enterprises are subject to a minimum level of tax of at least 15%, no matter where their profits are earned. This will help to end the race to the bottom in corporate taxation.
According to the OECD, Pillar One will be implemented through a multilateral convention and take effect in 2023. A multilateral instrument is expected to be developed by mid-2022 to implement Pillar Two, and an implementation framework should be available by the end of next year. The Two-Pillar solution was presented to the G20 Finance Ministers on October 13, 2021 and will be presented to the G20 Leaders Summit at the end of October.
Pillar One also requires countries to repeal any enacted digital services taxes (DSTs) and to abstain from imposing such taxes on any company from October 8, 2021 until the earlier of December 31, 2023 or the coming into force of Pillar One. However, in the press release quoted above, Finance reiterated its intention to proceed with the interim DST proposed in the 2021 Federal Budget. That DST would apply to large businesses that meet certain revenue thresholds and would consist of a 3% tax on revenue from digital services that rely on data and content contributions from Canadian users. See our detailed blog summarizing Canada’s DST here.
Legislation to implement Canada’s DST is set to be released in 2021. The DST would be payable as of 2024 in respect of revenues earned as of January 1, 2022, but would only apply if the treaty implementing the OECD agreement has not come into force. This may cause considerable uncertainty and unnecessary administrative costs for MNEs potentially subject to Canada’s DST.