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New era of taxation: Two-pillar solution shows massive global coordination
The October 2021 consensus over the OECD/G20's two-pillar solution for digital taxation is an incredible demonstration of international cooperation in addressing a global challenge.
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President Joko Widodo (right) greets Italian Prime Minister Mario Draghi on Oct. 30, 2021 at the Group of 20 Leaders' Summit in Rome. (AFP/Alberto Pizzoli)
On Oct. 8, 2021, all but four of the 140 member jurisdictions of the Organisation for Economic Co-operation and Development/Group of 20 (OECD/G20) Inclusive Framework on Base Erosion and Profit Shifting (IF) agreed by consensus to the revised blueprint of the two-pillar solution “to address the tax challenges arising from the digitalization of the economy”, dubbed Pillar One and Pillar Two.
This monumental achievement was immediately echoed by G20 finance ministers in their October communiqué on plans to sign the multilateral convention (MLC) in mid-2022, followed by global enforcement in 2023.
This means that in less than two years, all member jurisdictions, including Indonesia, must prepare all necessary measures to implement both pillars while coordinating with the OECD’s Task Force on the Digital Economy (TFDE) to finalize the rules.
What do we know of these initiatives so far? And what impacts are anticipated on Indonesia's current tax regime?
The two-pillar solution has been the long-anticipated outcome of Action 1 of Base Erosion and Profit Shifting (BEPS) 2015, which issued an urgent call for global solutions on tax issues in dealing with the digital economy.
Pillar One introduced the novel concept of nexus and share of income taxing rights that does not rely on a company’s physical presence in a market jurisdiction, hence addressing the gap in existing tax treaties on tackling the free rider problem.
Pillar Two, meanwhile, focused on addressing the remaining BEPS issues by introducing global minimum tax through several new rules, including the Income Inclusion Rule, Undertaxed Payment Rule and Subject to Tax Rule.
