The Organization for Economic Cooperation and Development (OECD) has been working on a new tax agreement that will change the global tax system as we know it. The agreement, which is set to take effect in 2021, aims to address tax challenges posed by the digital economy and ensure that multinational companies pay their fair share of taxes.

The new tax agreement, known as the “Two-Pillar Plan,” consists of two major components. The first pillar proposes a new approach to taxation that will allocate more taxing rights to the countries where the multinational companies’ customers are located, rather than the countries where the companies are headquartered. This approach seeks to ensure that digital companies with no physical presence in a country pay taxes in the countries where their customers are based.

The second pillar proposes a global minimum tax rate of at least 15%, which will ensure that multinational companies pay a minimum level of tax regardless of where they are headquartered. The aim is to prevent companies from avoiding taxes by shifting their profits to low-tax countries.

The agreement, which has the backing of major economies including the US, Germany, and France, is seen as a significant step forward in international tax cooperation. It is expected to generate additional tax revenue for countries and reduce the risk of tax disputes between governments and multinational companies.

However, the agreement is not without its challenges. Some countries, particularly those with low tax rates, may resist the proposal for a minimum tax rate. Additionally, implementation of the agreement may be difficult, as it requires the cooperation of many countries with different tax systems and priorities.

Despite these challenges, the OECD tax agreement is a positive development in the fight against tax avoidance and the fair distribution of tax revenue. It represents a key step toward a more equitable international tax system and can help ensure that multinational companies pay their fair share of taxes.