The OECD has come out with a new multilateral convention to check base erosion and profit shifting to ensure that MNCs pay a fair share of taxes in the country of operation.

“The ... convention moves the international community a step closer towards finalisation of the Two-Pillar Solution to address the tax challenges arising from the digitalisation and globalisation of the economy,” the OECD said.

The proposed two-pillar solution consists of two components — Pillar One is about the reallocation of additional share of profit to the market jurisdictions and Pillar Two consists of minimum tax and subject to tax rules.

The Organisation for Economic Cooperation and
Development (OECD) said that the Multilateral Convention (MLC) to implement Amount A of Pillar One reflects the current consensus achieved among 138 member countries.

Amount A of Pillar One coordinates a reallocation of taxing rights to market jurisdictions with respect to a share of the profits of the largest and most profitable multinational enterprises (MNEs) operating in their markets, regardless of their physical presence.

According to the MLC, the ‘Amount A’ deals with
reallocation of taxing rights of over 25 per cent of the residual profit of the largest and most profitable MNEs to the jurisdictions where the customers of those MNEs are located.

“Under Pillar One, taxing rights on about $200 billion in profits are expected to be reallocated to market jurisdictions each year.

“This is expected to lead to annual global tax revenue gains of between $17‑32 billion, based on 2021 data,” the OECD said.

The OECD said Pillar Two introduces model rules for the global minimum tax that countries may implement into their domestic law which will ensure large MNEs are subject to an effective tax rate of 15 per cent on their profits in every jurisdiction.