The Pillar One and Two blueprints (BEPS 2.0) following a meeting of the OECD-led coalition of 137 countries, were released yesterday.
Contrary to expectations, there was no agreement on either blueprint by the Inclusive Framework members and it is now expected that consensus could be achieved by mid-2021.
The Blueprint documents are fairly consistent with previous communication from the OECD and demonstrate an evolution of the Unified Approach proposals from last October. In summary:
- Pillar One continues to advocate the creation of a new taxing right and new nexus rules that move away from the traditional “physical presence” requirements; and
- Pillar Two proposes the introduction of a global minimum tax and rules, to minimize global tax competition.
From a Pillar One perspective, countries are yet to agree on the scope, Amount A, and whether, as proposed by the United States, Pillar One reform should be made optional for multinationals. Also unresolved is the issue of how much profit is considered residual profit and what percentage would be reallocated. For Amount A, there is general agreement on the need for a new taxing right that is not based on physical presence and on a solution anchored on a net basis tax that uses a formulaic approach for the allocation of profits for business within the scope of Pillar One.
There is a general agreement that any solution will have to use thresholds, that consolidated financial accounts should be used as the starting point with limited book to tax adjustments, and that losses are taken into account (although this requires to be refined). There is also general agreement that segmentation is required to determine the tax base along with a broad safe harbor or exemption rules to reduce complexity.
There is a commitment to make sure that double tax is eliminated in a multilateral setting. Countries want to make progress on determining Amount B to simplify transfer pricing calculations for baseline marketing and distribution activities. A solution for Pillar One would include a new multilateral tax certainty process. For Amount A, a multilateral convention would be developed to implement the solution.
From a Pillar Two perspective, while a number of elements have been broadly agreed to, a “subject to tax rule” will have to be included for it to have a political agreement and reach global consensus.
The report provides an “impact assessment” although not for each country. Some key highlights:
- The overall impact is likely to boost global corporate income tax revenues by up to 4% ($100 billion), with global gains expected to be derived primarily from the implementation of Pillar Two.
- Pillar One is expected to result in a further reallocation of $100 billion to market jurisdictions (which, for some business models, are the jurisdictions where the users are located) which is likely to result in a modest increase in global tax revenues.
- The impact assessment goes on to further clarify that the proposals will predominantly impact taxpayers that are high-profitable multi-national enterprises (“MNEs”) that are digitalized and use significant intangibles in the case of Pillar One, and MNE’s engaging in profit shifting in the case of Pillar Two.
The Blueprint documents are scheduled to be discussed at the G20 Finance Ministers and Central Bank Governors meeting on October 14, and a public consultation process has begun inviting stakeholder feedback and open until December 14, 2020.
Multinational Groups should actively continue monitoring progress leading up to countries arriving at a consensus and contribute to the consultation process that closes at the end of this year. Businesses with a digital footprint that heavily rely on intangibles, should model the impact of these proposals. Furthermore, businesses that have continued to retain traditional tax structures and/or that rely on traditional physical presence requirements, should review such arrangements
A copy of the report released by the OECD can be viewed here: https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-one-blueprint-beba0634-en.htm