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OECD’s Minimum Tax Work Has a Long Way to Go, Experts Say

Posted on Nov. 11, 2019

The OECD’s latest paper on its global anti-base-erosion (GLOBE) measure, which focuses on only part of the proposal, drew mixed reactions from stakeholders, who noted the challenges ahead as work on the idea continues.

The consultation document, published November 8, focuses on global minimum taxation, which constitutes pillar 2 of the OECD’s ambitious two-pillar June work program. That program, which also addresses the nexus and profit allocation issues under pillar 1, serves as a roadmap for reaching global agreement on revising the international corporate tax rules to address the tax challenges of the digital economy by the end of 2020.

The pillar 2 draft reaffirms the GLOBE proposal’s four main components (an income inclusion rule, an undertaxed payments rule, a subject-to-tax rule, and a switchover rule), which are meant to act as a coordinated set of rules. The draft seeks input on three elements of the income inclusion rule, which would capture the income from a multinational enterprise's foreign branch or controlled entity if it is subject to an effective tax rate that is lower than a minimum rate.

The rule, which has been described as being similar to the U.S. Tax Cuts and Jobs Act's global intangible low-taxed income provision, would effectively operate as a top-up to reach the minimum rate of tax, but the draft notes that no decisions have been made about what that rate of tax might be.

While the OECD welcomes input on the GLOBE proposal as a whole, it specifically asks for views on three aspects of the income inclusion rule: the use of financial accounts to determine the tax base; blending, which refers to an MNE's ability to combine after-tax income from various sources that have been subject to high and low tax rates to calculate an effective tax rate on that income; and potential carveouts and thresholds.

The two biggest components of the GLOBE are the income inclusion rule and the undertaxed payments rule, according to Will Morris, deputy global tax policy leader at PwC and chair of the Business and Industry Advisory Committee to the OECD’s Committee on Taxation and Fiscal Policy.

However, it’s apparent that the OECD isn’t as far along on the latter rule, Morris said. “I imagine they decided to stage it because they were ready to go effectively on the income inclusion rule, but decided for the moment to hold the undertaxed payments rule, although I wouldn’t expect them to hold for that long,” he said.

The income inclusion rule and the base-eroding payment rules — which comprise the undertaxed payments rule and the subject-to-tax rule — both require determining an effective tax rate, according to Jesse Eggert, principal, international tax, at KPMG’s Washington national tax practice and former senior adviser at the OECD’s Centre for Tax Policy and Administration.

“Measuring the tax base, degree of blending, and potential carveouts are challenging issues that appear to have relevance for both sets of rules,” Eggert said. The consultation document indicates that more work is progressing on the overall GLOBE proposal, such as on the design and operation of the base-eroding payment rules, and that additional consultations might be necessary, he added.

“For now, I think one big takeaway from the draft’s focus on three specific design details is that arriving at a fully fleshed-out pillar 2 proposal will require working through very challenging technical issues, which have the potential to generate significant complexity in administration and compliance,” Eggert said.

It makes no sense to discuss the development of the income inclusion rule without a concurrent discussion on rules for a tax on base-eroding payments because there are so many interlinked and cross-cutting issues, according to Francis Weyzig of Oxfam Novib, who expressed disappointment in the pillar 2 draft and its implications for developing countries.

Weyzig also pointed out several issues with the GLOBE discussion draft, including the discussion of carveouts without indicating what payments may be denied for deduction under the undertaxed payments rule, and a lack of discussion on the potential trade-offs between the design of the income inclusion rule, the subject-to-tax rule, and the undertaxed payments rule, as well as rule order.

Over the past several weeks, business have been consumed by pillar 1 and aren’t paying much attention to pillar 2, according to Morris, who noted that many in the business sector may be surprised that the discussion draft did not propose whitelisting GILTI as a carveout. “Companies will now realize they have to pay serious attention to pillar 2 as well,” he said.

Meanwhile, EU finance ministers appeared divided on the need for pillar 2 during a closed-door discussion at the Economic and Financial Affairs Council’s November 8 meeting. While some countries, like France and Germany, which had first proposed the GLOBE, remained in favor of the OECD’s work on pillar 1, others, including Ireland, dug in their heels, saying that the proposal would be unacceptable.

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