For tax authorities worldwide, international taxation of multinational companies has long been a crucial challenge. The United States has been among the main backers of negotiations on a major reform of the international taxation of multinational companies.

On the other hand, Estonia and Ireland, known as jurisdictions that offer tax benefits to foreign investors, have long “hampered” these negotiations. However, an agreement was recently reached between 136 countries (out of 140) within the G20 and the Organization for Economic Cooperation and Development (“OECD”), according to which multinational companies will be subject to global corporate tax rate of 15%. Four (4) countries – Kenya, Nigeria, Pakistan and Sri Lanka, have not yet joined the agreement.

The multilateral convention, which will be a vehicle for implementing innovations related to taxation of multinational companies, is already under development and countries aim to sign it during 2022, with effective implementation from 2023.

The reform proposal is based on the two pillars.

The first pillar implies the obligation of companies to pay taxes in the countries where the sale of their products and/or services takes place, even if they are not physically present there. Practically, the priority is on the principle of “turnover” instead of the principle of “headquarters”, and companies will pay taxes where they generate turnover, regardless of its form. Therefore, the purpose is to re-allocate the right to taxation. This rule will apply to taxation of companies with revenues of more than EUR 20 billion and a profit margin of more than 10%.

The second pillar implies the establishment of a minimum global tax rate, which is 15%, after insistence of Ireland, despite initial proposals of some countries that it should be 21%. This rule will apply only to companies with revenues above EUR 750 million.

The essential goal of the reform is to ensure a fairer distribution of right among countries for taxation of profits of the largest multinational companies.

What is the impact of this reform on Serbia?

Bearing in mind that a significant part of the goods on the market of the Republic of Serbia is imported, taxation of foreign companies by place of “turnover” could have positive tax effects on the Serbian budget. Contrary to this, the Serbian budget could possibly be deprived for taxes paid by Serbian companies that generate most of their revenues in foreign markets.

Author: Goran M. Ćiraković, Attorney-at-Law

Photo: Pixabay