BEPS 2.0: Fundamentals for Global Businesses

The Base Erosion and Profit Shifting (BEPS) 2.0 initiative, spearheaded by the Organisation for Economic Co-operation and Development (OECD), represents a significant global undertaking to modernize international corporate tax rules. This reform was largely driven by the challenges the digital economy presented to traditional tax frameworks, which struggled to effectively tax profits generated across borders without substantial physical presence. At its core, BEPS 2.0 introduces a comprehensive two-pillar framework specifically designed to address these complexities, aiming to ensure multinational enterprises (MNEs) contribute their fair share of tax where economic activity and value creation truly occur.

Pillar One focuses on the reallocation of taxing rights among jurisdictions. It proposes new rules intended to determine where and how much profit of large MNEs should be taxed, shifting emphasis away from traditional physical presence requirements. The primary objective is to reallocate a portion of residual profit from the MNE’s headquarters or traditional locations to market jurisdictions where consumers or users are situated, even if the company maintains minimal or no physical footprint there. This component directly confronts the challenge of taxing highly digitalized and consumer-facing businesses, striving for a more equitable global distribution of taxing rights.

Following the principles established in Pillar One, Pillar Two introduces the Global Anti-Base Erosion (GloBE) rules. These rules are designed to ensure that large MNEs pay a minimum level of tax on the income earned in each jurisdiction where they operate. The most prominent feature of Pillar Two is the introduction of a 15% global minimum effective corporate tax rate. This rule generally applies to MNEs with consolidated group revenue exceeding €750 million. The implementation of this minimum tax has profound implications, as it seeks to reduce incentives for MNEs to shift profits to low-tax jurisdictions and aims to curb the potential for a downward spiral in corporate tax rates globally.

Together, these two pillars fundamentally reshape the landscape of international taxation. They signify a global movement towards taxing profits closer to the end markets and establishing a worldwide floor on corporate tax rates. While their implementation is complex and ongoing, grasping the fundamental distinction and purpose of each pillar, particularly the impact of the 15% minimum tax threshold introduced under Pillar Two, is essential for any global business seeking to navigate and adapt to the evolving international tax environment.

To summarize the core focus of each pillar: