Historic Global Tax Reform Sealed in Riyadh
Finance ministers from the Group of Twenty (G20) nations convened in Riyadh, Saudi Arabia, on March 24, 2025, culminating years of intense international negotiation by finalizing a landmark global agreement on digital taxation. This pivotal accord represents a fundamental reshaping of the international corporate tax architecture, addressing the challenges posed by the modern, increasingly digitized economy. The agreement is designed to ensure that large multinational enterprises, particularly major tech giants that operate across borders with minimal physical presence, contribute their fair share of taxes in the jurisdictions where they generate profits and economic value, rather than solely in the countries where their legal headquarters are located.
Pillars of the Riyadh Accord
The finalized agreement in Riyadh is built upon two interconnected pillars, designed collaboratively through the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). These pillars aim to create a more stable and equitable international tax system.
Pillar One focuses on the reallocation of taxing rights. Traditionally, corporate tax has been predominantly paid in the country where a company has a physical presence or subsidiary. However, digital businesses can serve customers globally from a single location. Pillar One addresses this by creating a new taxing right for market jurisdictions – the countries where consumers or users are located. A portion of the residual profit of the largest and most profitable multinational enterprises will be reallocated to these market jurisdictions, irrespective of physical presence. This move is specifically targeted at ensuring that companies earning substantial revenue from users and customers in a country contribute taxes there, reflecting the economic reality of their operations.
Pillar Two establishes a global minimum corporate tax rate. A core component of the Riyadh agreement is the commitment to a minimum effective corporate tax rate of 15%. This rate is intended to put an end to the global “race to the bottom,” where countries compete by offering ever-lower corporate tax rates to attract investment, thereby eroding the global corporate tax base. Under Pillar Two rules, if a multinational company’s effective tax rate in a particular jurisdiction falls below this 15% minimum, its home country (or another country where it operates) can apply a top-up tax to bring the rate up to the agreed floor. This provides a strong disincentive for companies to shift profits to low or no-tax jurisdictions and ensures that large corporations pay a baseline level of tax globally.
A Culmination of Years of Effort
The agreement reached in Riyadh is the culmination of intricate and often challenging discussions that have taken place over many years under the umbrella of the OECD/G20 Inclusive Framework. This framework brings together over 130 countries and jurisdictions to cooperate on international tax issues. The need for reform became increasingly apparent as globalization and digitalization accelerated, highlighting how existing international tax rules, developed in the 20th century, were struggling to cope with 21st-century business models. Efforts to combat tax avoidance, base erosion, and profit shifting by multinational corporations have been a priority for the G20 for nearly a decade, leading to this historic consensus.
The Riyadh Meeting: A Decisive Moment
The meeting held in Riyadh, Saudi Arabia, on March 24, 2025, proved to be the decisive moment for formalizing the agreement. Finance ministers from the leading economies gathered to navigate the final complexities and reach a consensus on the technical and political aspects of the two-pillar solution. The successful conclusion of these negotiations in Riyadh underscores the commitment of G20 nations to multilateralism and their shared goal of creating a fairer and more stable international tax system that is fit for the digital age. The meeting represented a critical step from theoretical agreement to the finalization of the practical framework.
Path to Implementation: National Legislation by Early 2026
With the agreement finalized, the focus now shifts to the complex but crucial phase of implementation. The G20 accord anticipates that member states will translate the global framework into their respective national legislation. This process is expected to begin swiftly, with the target for implementation anticipated to be by early 2026. Implementing the two pillars requires significant changes to domestic tax laws and international tax treaties in numerous countries. This will involve detailed legislative work and requires careful coordination among jurisdictions to ensure the rules are applied consistently and effectively across borders, minimizing the risk of double taxation or unintended outcomes. The successful implementation hinges on the political will and administrative capacity of each signatory nation.
Reshaping the Global Tax Landscape
The Riyadh agreement is poised to fundamentally reshape the international corporate tax architecture that has been in place for decades. For countries, particularly market jurisdictions, it holds the promise of increasing tax revenues from multinational corporations that previously paid little or no tax locally despite significant economic activity. For businesses, it means navigating a new set of international tax rules, which aims for greater clarity and consistency but will require significant adjustments to tax planning and compliance. While the agreement is hailed as a major step towards fairer tax competition and curbing harmful tax practices, its full impact will unfold over time as it is implemented globally. Challenges remain, including ongoing technical work, potential for disputes between jurisdictions, and ensuring the framework is adaptable to future changes in business models.
Looking Ahead
Beyond the finalization in Riyadh, the technical work under the OECD/G20 Inclusive Framework will continue to support the implementation process. This includes developing model rules, commentary, and guidance to assist jurisdictions in incorporating the agreement into their national laws. Continued international cooperation will be essential to address any emerging issues and ensure the smooth functioning of the new tax system.
A New Era for Corporate Taxation
In conclusion, the agreement finalized by G20 Finance Ministers in Riyadh on March 24, 2025, represents a historic breakthrough in global tax cooperation. By establishing a framework for taxing multinational profits where economic activity occurs and setting a global minimum corporate tax rate of 15%, the Riyadh Accord marks a decisive step towards a more just, stable, and effective international corporate tax system for the digital era. It signals a strong global commitment to ensuring large corporations pay their fair share, ultimately benefiting economies and citizens worldwide.
