Issue

On October 8, 2021, following extensive discussions led by the Organisation for Economic Co-operation and Development (OECD), 136 jurisdictions, including Canada, agreed on major reforms to the international tax system as it applies to large multinational enterprises (MNEs). The reforms aim to address tax challenges that arise due to the digitialization of the economy.

The agreement consists of two parts, known as Pillar One and Pillar Two.

• Pillar One will re-allocate some taxing rights over very large MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether they are physically located there.
• Pillar Two introduces a 15 percent global minimum tax for large MNEs.

Starting in 2023, large MNEs will be subject to a minimum corporate tax rate of 15 percent. Starting in 2024, the largest of these MNEs will also be required to pay taxes on profits in the countries where they are earned, even if they have no physical presence in the country.

Things to consider

• In a press conference on October 6, 2021, Finance Minister Chrystia Freeland estimated that Canada stands to collect as much as $4.5 billion in additional revenue every year once the international agreement is fully implemented.
• This is an agreement in principle that will require changes to both treaties and legislation in Canada and around the world.
• The new rules will only apply to the largest MNEs: for Pillar One, those with revenues over €20 Billion and for Pillar Two, those with revenues over €750 Million.
• There are certain exceptions—for example, the regulated financial sector and the extractive industry will not be subject to Pillar One.
• Canada announced the introduction of a Digital Services Tax (DST) in Budget 2021. However, this new global agreement commits countries to removing DSTs should the new rules be implemented and commits countries to not introducing new DSTs before 2024 should the new rules not be implemented.
• The DST will be imposed as of 2024, should the global agreement not come into force. In this event, the DST would be payable as of 2024 on revenues earned as of January 1, 2022 onwards.
• Fully implementing the agreement may be challenging as domestic legislative and parliamentary steps will be required in numerous countries with varying levels of political consensus about the agreement.

Next steps

The OECD will release model legislation and model treaty rules for Pillar Two in late 2021. In 2022, the terms of a new multilateral treaty or convention for Pillar One will be negotiated with signature targeted for mid-2022.

• Countries are expected to adopt implementing legislation, to take effect in 2023.
• The Canada Revenue Agency (CRA) is preparing for the substantial administrative aspects of both the new agreement and the DST which will include:
  • Development of forms and processing systems
  • Exchange of information with other jurisdictions
  • Dispute prevention and resolution
  • Compliance activities
• We anticipate that the new rules will require substantial guidance. It will be important for this guidance to be consistent internationally and the CRA work will with international colleagues as well as the Department of Finance in this regard.

Key messages

• The Government is committed to efforts to ensure that multinational enterprises pay their fair share of tax on the profits they earn by doing business in Canada and around the world.
• This new global agreement is a major step forward for modernizing and stabilizing the international tax system.
• The Government will continue to work with the international community, provinces and territories and other stakeholders to ensure that the tax system is fair and effective.
• Nothing in this agreement affects the recent changes made to ensure that the Goods and Services Tax/Harmonized Sales Tax applies to the growing digital economy.