July 1, 2021, Ukraine and 129 other members of the Program of Enhanced Cooperation on BEPS (OECD / G20 Inclusive Framework on BEPS) joined the ambitious plan to reform the international tax system for large businesses.
The plan consists of two blocks (Pillar 1 and Pillar 2) and updates the basic principles of the international tax system, which has existed for about 100 years and no longer meets the needs of today's globalized and digital economy. The new rules apply to the largest international business groups. They should ensure harmonization of the approach of the governments of different countries in the taxation of large high-tech businesses, which will contribute to the stability of the tax system and reduce the administrative burden on business.
Measures for Block 1 (Pillar 1) provide for a new approach to the allocation of rights of states to tax the profits of major international business groups (including digital business). Each state will have the right to tax the profits of a group that sells goods or services in that state, regardless of whether the group has a business unit in the country. Consequently, a foreign business may be subject to taxation regardless of the existence of a classic permanent establishment.
Block 2 measures (Pillar 2) are intended to supplement and improve the taxation rules for foreign companies located in jurisdictions with low effective tax rates. Pillar 2 also provides for measures to be implemented through international tax conventions concerning the taxation of transactions with residents of low-tax countries.
The main provisions concerning both blocks are set out in the Inclusive Framework statement published on the OECD web page. The statement contains obligations that would be automatically binding on Inclusive Framework countries. For the new rules to work, Ukraine, as well as other Inclusive Framework participants, will need to sign international agreements and adopt legislation to be developed by the OECD.
The Inclusive Framework Working Group plans to develop detailed rules for the implementation of the Pillar 1 and Pillar 2 initiatives in October 2021. According to the statement, the new rules may become effective before 2023.