TIRANA, Oct. 11 – Without much fanfare at home, Albania has joined the U.S.-led international agreement that limits how low multinational corporations are taxed in jurisdictions worldwide.
Albania becomes one of 136 countries and jurisdictions to sign the deal, representing more than 90 percent of global GDP.
The aim of the deal is to ensure large corporations pay a fair share of tax wherever they operate and generate profits, according to the OECD, the club of wealthy countries advocating for the dead.
At the core of the deal is a minimum corporate rate of 15 percent.
“As of this morning, virtually the entire global economy has decided to end the race to the bottom on corporate taxation,” U.S. Treasury Secretary Janet Yellen said. “Rather than competing on our ability to offer low corporate rates, America will now compete on the skills of our workers and our capacity to innovate, which is a race we can win.”
Ultimately, the deal would have to be approved in legislatures around the world, which means it still faces an uphill battle until implementation.
According to the PwC, the corporate income tax (CIT) rate in Albania is currently 15 percent, the lowest that would be allowed by the deal. CIT is assessed on the taxable profits calculated as taxable income less deductible expenses.
Albanian legislation does come with some caveats, however, which is unknown how it will be applied to multinational corporations.
The deal, among other things, would also require global companies to pay taxes in the countries where they sell goods and services regardless of whether they are physically present there, affecting huge American companies like Amazon and Netflix, which already sell to clients in Albania.
Taxpayers with annual turnover up to ALL 14 million Albanian are exempt from CIT, whereas taxpayers with annual turnover greater than ALL 14 million are subject to a 15 percent CIT rate.
However, taxpayers whose activity is software production and development are subject to a 5 percent CIT. Similarly, taxpayers whose activity is based on agricultural co-operation and those whose activity is certified as “agro tourism,” in accordance with the respective laws, are subject to a 5 percent CIT.
Albanian law applies the principle of worldwide taxation. Resident entities are taxed on all sources of income in and outside the territory of Albania, while non-resident entities are taxed on income generated only in the territory of Albania, according to PwC.
What does the deal mean?
Albania signed the deal as part of the OECD/G20 Inclusive Framework on BEPS and joined the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. It updates and finalises a July political agreement by members of the Inclusive Framework to fundamentally reform international tax rules.
The two-pillar solution will be delivered to the G20 Finance Ministers meeting in Washington D.C. on 13 October, then to the G20 Leaders Summit in Rome at the end of the month.
“The global minimum tax agreement does not seek to eliminate tax competition, but puts multilaterally agreed limitations on it, and will see countries collect around USD 150 billion in new revenues annually,” the OECD notes.
Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises. It will re-allocate some taxing rights over multinational enterprises from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there. Specifically, multinational enterprises with global sales above EUR 20 billion and profitability above 10 percent – that can be considered as the winners of globalization – will be covered by the new rules, with 25 percent of profit above the 10 percent threshold to be reallocated to market jurisdictions.
Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year. Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues.
Pillar Two introduces a global minimum corporate tax rate set at 15 percent. The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually. Further benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.
Countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023. The convention is already under development and will be the vehicle for implementation of the newly agreed taxing right under Pillar One, as well as for the standstill and removal provisions in relation to all existing Digital Service Taxes and other similar relevant unilateral measures. This will bring more certainty and help ease trade tensions. The OECD will develop model rules for bringing Pillar Two into domestic legislation during 2022, to be effective in 2023.
Developing countries, as members of the Inclusive Framework on an equal footing, have played an active role in the negotiations and the Two-Pillar Solution contains a number of features to ensure that the concerns of low-capacity countries are addressed. The OECD will ensure the rules can be effectively and efficiently administered, also offering comprehensive capacity building support to countries which need it.
Ireland, Hungary and Estonia — all of which have corporate tax rates below 15 percent — at first resisted the plan but are now on board.
Ireland currently has a rate of 12.5 percent, which has helped it attract large amounts of foreign investment and become a base for big American firms such as Apple.
Holdout countries include Kenya, Nigeria, Pakistan and Sri Lanka.
