Navigating the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in the Digital Economy

The digital economy has been growing at a rapid pace, outpacing the global GDP by two and a half times over the last 15 years. This growth has fundamentally changed how businesses operate in foreign markets, with many multinational corporations conducting business without a physical presence in the countries where they operate. This has led to some companies using base erosion and profit sharing (BEPS) strategies to avoid paying taxes, which has been harmful to countries, especially developing nations, that rely on corporate income tax.

In response to these challenges, the Organisation for Economic Co-Operation and Development (OECD) has been working on standardizing international taxation through the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. This framework aims to address tax challenges arising from the digitalization of the economy through its two-pillar solution.

The first pillar of the OECD/G20 Inclusive Framework establishes new nexus and profit allocation rules for large multinational enterprises, allowing countries to tax commercial activities that occur within their borders regardless of physical presence or market jurisdiction. The second pillar ensures that large multinational companies pay a 15% minimum tax regardless of where they are headquartered or operate through mechanisms such as the Subject to Tax Rule and Global Anti-Base Erosion Rules.

While the OECD has been working on implementing these changes since 2013, not all member jurisdictions have agreed to the two-pillar solution yet. This has pushed the implementation date from 2023 to 2024, with 140 OECD members currently part of the framework.

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting represents a significant step towards modernizing international taxation and ensuring that multinational corporations pay their fair share of taxes in the countries where they operate.