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The Global Minimum Tax and the Developing World: Transcript

Posted on Feb. 2, 2022

The OECD’s inclusive framework reached a major milestone in October, when 136 countries endorsed a global minimum tax to combat base erosion and profit shifting in the digital economy. But developing countries will face particular challenges as they implement the tax, and some believe the plan will prove a poor fit for those economies.

In the 15th edition of Tax Analysts’ “Taxing Issues” webinar series, Tax Notes International contributing editor Nana Ama Sarfo explored these questions with Carlos Protto, director of international tax relations and director of direct taxation in the Ministry of Economy of Argentina, Marlene Nembhard Parker, chief tax counsel, legislation, treaties and international tax matters, with Tax Administration Jamaica, and Abdul Muheet Chowdhary, senior programme officer and head of the South Centre Tax Initiative. Tax Analysts president and CEO Cara Griffith moderated the discussion, which took place January 26.

Cara Griffith: Welcome, everyone. I'm Cara Griffith, the president and CEO of Tax Analysts. Thank you for joining us today for a discussion on how countries around the world are thinking about implementing the OECD inclusive framework’s new rules on base erosion and profit shifting, or BEPS, and the impact that those rules might have on the developing world.

CG: Today is the 15th in Tax Analysts’ series of public discussions that we call “Taxing Issues.” We launched this series in 2020 as another of our efforts to encourage debate on tax issues. We've been bringing the tax community together with leading policymakers and experts, for bipartisan discussions on the future of tax policy. While we hope to hold in person events sometime soon, for now, we will continue to hold these discussions in a virtual format. We welcome your feedback on how to make them more interactive. We also welcome your suggestions for future webinar topics. You can send your feedback and suggestions to events@taxanalysts.org.

CG: We also welcome your questions for today's event. Thank you to those of you who emailed your questions in advance. Please use the chat feature to submit questions during today's event. For our panel discussion, I'll begin by asking a few questions and then I will turn to questions from you, our audience, and I promise to get to as many of your questions as time permits.

CG: And now onto the topic at hand. Around the world, the digital revolution has changed the way businesses operate. That in turn has generated debates on the legal, regulatory, and of course tax implications of an international digital economy. Given that a digital economy has no national borders, where should businesses pay their taxes? What part of their earnings should be taxed? And how do we develop a global system that's acceptable to all governments? Many governments in the developed world believe that we needed a comprehensive global consensus-based tax regime that addresses both the allocation of profits, as well as base erosion and profit shifting.

CG: To meet that challenge, the OECD and G-20 launched the BEPS project several years ago. But the OECD believed that to really address base erosion and profit shifting, they needed as many countries around the world as possible to sign on to the project. So they gave countries in the developing world the opportunity to provide input on implementation.

CG: And that, in a hundred words or less, is how the inclusive framework came about. In October 2021, 136 countries reached agreement on the inclusive framework. That was a monumental achievement, given that those countries represent more than 90 percent of the world's gross domestic product or GDP. The rules will help implement the two-pillar solution. Pillar 1 addresses nexus and profit allocation. Pillar 2 introduces a global minimum corporate tax of 15 percent. The rules provide instructions for countries to implement the so-called global anti-base erosion or GLOBE provisions that would ensure that large multinationals pay a minimum level of tax on the income they generate in each jurisdiction in which they operate.

CG: The inclusive framework was the product of a novel approach to tackling global corporate tax issues in that all countries, OECD and non-OECD, could participate in some way. It was the first time that developing countries could play a meaningful role in modernizing the international corporate tax system. Still, questions remain for the developing world as the detailed implementation plan is put into place. Will developing countries receive a meaningful boost in corporate tax revenues? Will they be able to implement the package, both legislatively and technically? There's a lot on the line.

CG: But thankfully, we have just the panel to shed light on what's next in terms of implementation and the challenges to come. First, we have Carlos Protto, director of international tax relations and direct taxation in Argentina's Ministry of Economy. Next, we have Marlene Nembhard Parker, chief tax counsel for legislation, treaties, and international tax matters, at Tax Administration Jamaica. We also have Abdul Muheet Chowdhary, senior programme officer and head of the South Centre Tax Initiative. And finally, we have Nana Ama Sarfo, a contributing editor for Tax Notes International and a frequent author on this topic.

CG: Welcome to all of you, and thank you for joining us today. I'm really looking forward to our discussion. Ama, to kick things off, could you briefly walk us through how the global minimum tax is designed to operate? And maybe give us some insight into how developing countries view the idea of a global minimum tax?

Nana Ama Sarfo: Absolutely. And first, I just want to thank you, Cara, for inviting us today to talk about this really important topic. And secondly, it's a real honor to be here alongside Carlos and Marlene and Abdul to break down what this OECD proposal might mean for developing countries.

NAS: So, as Cara had alluded to, when we talk about the global minimum tax under pillar 2, we're not talking about one standalone tax. Actually, the global minimum tax is a set of interlocking rules, and they ensure that large multinational groups are paying a minimum 15 percent effective tax rate on their profits in the jurisdictions where they do business. And by large companies, I mean, large multinational groups that earn at least 750 million euros annually in global revenue. Now the two parts are the income inclusion rule and the undertaxed payments rule.

NAS: So, under the first rule, which is the main rule, the income inclusion rule, we look at a multinational group's activity to determine, one, where it is doing business, and then secondly, in which jurisdiction is that activity being taxed below the 15 percent minimum effective rate? So, after that analysis is done then the country where the multinational is headquartered is allowed to apply a top-up tax on that undertaxed income. So essentially, the headquarter jurisdiction gets the first bite at the apple. And then if for some reason it chooses to not exercise that right, then the next entity in the ownership chain would have the opportunity to apply that top-up tax and then so on and so forth, moving down the chain.

NAS: So, since developing countries generally are not headquarter companies, this likely won't be of much benefit to them. That being said, countries can apply the income inclusion rule to multinationals headquartered in their jurisdictions, even if those companies do not meet the 750 million euro threshold. So, this is a nod to smaller . . . To countries with smaller multinationals, smaller countries. But then, also, I think it ensures that as countries are experiencing more development and generating more home-grown multinationals, that they don't lose out on that opportunity to tax that income, even if those companies aren't at that large threshold.

NAS: And then the second rule which I would say is of more interest to developing countries is the undertaxed payments rule, and that operates as the backstop to the income inclusion rule. And so that means that it applies to multinational group entities that fall outside of the scope of the income inclusion rule. So perhaps an entity is part of the MNE group, but their parent company isn't subject to the income inclusion rule, but yet they may have some undertaxed income by perhaps making deductible payments to a low-tax entity. So the undertaxed payments rule requires an adjustment, like denying that deduction and that is done by applying a top-up tax in proportion to the deductible payment. And that is applied by the jurisdiction where that entity is located. So it's a source-based rule, which is important for developing countries, which generally are or typically are source countries.

NAS: Now, there are some exemptions and carveouts under pillar 2. Importantly, there's something called a substance carveout, and that excludes a certain amount of payroll costs and then also income from certain assets. That starts with a 10 percent carveout for payroll costs and 8 percent carveout for tangible assets. And then those numbers will shrink over a 10-year period until they both reach a 5 percent threshold, and that will be the permanent carveout after that 10-year transition period.

NAS: And then the OECD also decided to exclude from the undertaxed payments rule multinationals that are in their initial phase of international activity. So the OECD is defining that as multinationals with no more than 50 million euros in tangible assets abroad, and that operate in a maximum of five other jurisdictions aside from their parent jurisdiction. And that applies to either the first five years of that multinational’s operations, or the first five years in which they come into the scope of the GLOBE rules. And of course, that also raises some questions about whether or not perhaps that provision might be gamed by some companies.

NAS: And then lastly, the top-up tax doesn't apply if an entity's earnings are distributed within four years and are taxed either at the minimum rate or above that rate. And that was included in a nod to Estonia, which has a distribution tax system.

NAS: So those are some very important exemptions or carveouts. It's also important to note that government entities, nonprofit organizations, pension investment and real estate funds are not . . . They do not fall under the global minimum tax. And then there are also some other entities that are excluded. But that is just a really broad overview as to what the global minimum tax will entail. The GLOBE rules are not mandatory, but they have been adopted as a common approach. So that means that jurisdictions aren't required to adopt these minimum tax provisions. But, one, if they choose to do so, they are doing so under the parameters set by the OECD. And, secondly, even if a country chooses not to apply the GLOBE rules, they accept that they will apply to multinationals that operate in their jurisdictions, but perhaps are headquartered elsewhere.

NAS: In a nutshell that is the global minimum tax, but pillar 2 also has another provision, a separate rule, which is called the subject-to-tax rule [STTR]. And that is a treaty-based rule that allows source countries to apply a top-up tax to certain intergroup payments that are inadequately taxed, either due to BEPS structures or due to insufficient taxing rights under a tax treaty. So that top-up tax is a 9 percent tax and it applies first when determining the minimum corporate tax rate the multinational is paying under the GLOBE rules, even though it's technically not a part of the GLOBE package.

NAS: So obviously, this is a lot of complexity. The OECD recently released the model rules for pillar 2, and they’re nearly 70 pages long. So that really begs the question of, “Why do we even need this minimum tax in the first place?” And the OECD’s answer to that would be that corporate tax rates have been on the decline, and there’s been a very real concern that they could continue to slide downward without any sort of intervention. I mean, in 2000, the OECD looked at corporate rates in 38 countries and found that six of them had rates of 25 percent or below. And almost two decades later in 2018, that number had nearly quadrupled to 22. So as for how developing countries feel about the global minimum tax, I think that’s an interesting question because they have so many different characteristics.

NAS: So there have been several different responses. But I would say that generally, developing countries support the idea of a minimum rate, but generally wanted the rate to be much higher, let’s say 21 percent, or 25 percent. Because developing countries typically do apply higher corporate income tax rates than developed countries, because they rely more heavily on that income. So typically, you’ll see developing countries apply corporate income tax rates at 30 percent, or even higher. And then you also have Caribbean countries like the Bahamas, or Bermuda or Cayman Islands, that do not impose a corporate income tax. And they have worried about what this means for their tax systems and for their national sovereignty, and their right to design their tax systems in a way that makes sense for them. So I think, overall, developing countries were hoping that they as source countries would have greater taxing opportunities under pillar 2. And pillar 2 doesn't really seem to deliver on that, at least not in the extent that they had hoped.

CG: Excellent, thank you so much. That's a ton of good background. And there's a lot of issues in there that we'll get to, I think, in a little bit more depth. But before that, Carlos, can I turn to you? And could you talk to us a little bit about implementation and tell us sort of where we are in the process and what's to come in the coming months?

Carlos Protto: Thank you, Cara. First of all, thank you for inviting me to be part of this distinguished panel with my colleagues here. And regarding your question on implementation and the status of the work that has been undertaken, as you're aware of, a lot of progress has been made since the G-20 requested the inclusive framework to develop a global solution to address the tax strategies of the digitalization of the economy. That happened in 2017.

CP: In the last four years unprecedented work has been taking place. And it was boosted by the pandemic, since that virtual environment allowed delegations to show and meet in closer meetings, or without short notice, and that allowed countries to keep up the pace. So as it has been described, a lot of work has been undertaken, that led to the global solution that was politically agreed in October last year. But that agreement was no more and no less than the building blocks, according to which the two-pillar approach will be implemented. Now, it is time for developing the implementation plan and the flesh that will be around the bones. So in the last couple of months, those technical elements of each building block have been developed. Most of them are already drafted, leading to model legislation or model rules, some of them to be implemented into our multilateral convention.

CP: That's for pillar 1. So, pillar 1 will require a multilateral convention to determine the rights and obligation for different states that are interested in implementing, as you said before, the pillar 1 solution that is new nexus and profit allocation rules to address the tax challenges of the digitalization. On pillar 2, there is a need for developing model legislations that will be passed by jurisdictions that are interested. So pillar 2 is not a minimum standard, it is an option for those interested jurisdictions to tackle remaining BEPS issues. So the timing is that the model legislation for pillar 2 is almost done. It will now . . . it is up for jurisdictions to pass their law and becoming effective for sooner implementation, probably in 2023. Regarding pillar 1, it is a little bit more complex, because that multilateral convention needs to be developed a lot. Most of each architecture is already determined, but then rules that will be included there need to be drafted and they depend on those other building blocks that are still under development.

CP: There will be a public consultation soon on those building blocks for pillar 1 regarding tax legislation, revenue sourcing, tax treatment of losses and the aberration mechanism, all those rules will need to be tuned up before it's been introduced into the multilateral convention. That multilateral convention and all those remaining building blocks require an approval from the inclusive framework that is expected to happen in May this year. And the signature of the multilateral convention is also expected by mid-June or July this year, in order to allow the internal process for ratification in jurisdictions and become effective, and as soon as possible. Hopefully in 2023. Thank you so much.

CG: Excellent, thank you. So we've gotten part of the way there, but we certainly have quite a long road and arguably an uphill road to go to get everything worked out. Marlene, we don't want to get too far into the details, particularly of the model rules because they are complex, and it is lengthy. But could you talk about some of the implementation challenges that developing countries are going to face and maybe talk about what the developing countries are worried about as the inclusive framework discussions move forward?

Marlene Nembhard Parker: Thank you very much, Cara, and it's also my pleasure and my honor to be on the panel with my esteemed colleagues. And in relation to the implementation of the consensus, what I will focus on are the immediate needs of developing countries in the implementation phase of the two-pillar solution. We are broadly concerned with the issue of time of implementation, complexity of the rules of implementation, the need for technical assistance, and we see implementation as broader than just the convention and the model rules.

MNP: I think for us in developing countries, we have to start at the point of the technocrats themselves becoming intimately associated with the rules, because this two-pillar solution has gone at such a blistering pace that we have not had time to really appreciate the rules, and we will have to brief our political directorate. And so that I think is where we will have to start in terms of implementation.

MNP: And the concern, I realize, is not just shared by developing countries, but I just want to quote briefly from no less a source than BIAC [Business at OECD], which is the business advisory group of the OECD, which in their letter dated January 6 to the OECD noted, they expressed their concerns about the cumulative effect of the rules. And they spoke about the fact that they fear that the model rules may prove such an administrative and compliance struggle for many tax authorities, even some of the largest and best resourced, given the proposed timeframes, as well as for taxpayers, given the fact that they have less than 12 months to implement. And so therefore, if developed countries, if BIAC is raising that as a concern, then you can imagine how much of a concern it will be for developing countries.

MNP: The other thing that we are concerned about is we in developing countries have to engage our stakeholders. The business community, we have found particularly in Jamaica, that whenever there are new radical changes in policy, it is best to engage your stakeholders, your business community, because it's an easier transition in terms of acceptance of rules. We have not had an opportunity to do that. It will also be vital to ensure that we get adequate technical assistance and capacity building support, which we will need not just in terms of developing the rules, but also incorporating the rules into our domestic law. We know that the OECD is trying to address some of these concerns by way of capacity building, but we are concerned that if you are building and the fundamentals themselves are complex, then maybe the issue is not capacity building, but the fundamentals of the rules that you need, you have to ensure are okay.

MNP: We’re also concerned about the fact that some countries, their tax incentive regimes are going to be impacted by this. And you would imagine that for developing countries, which rely a lot on foreign direct investment, then they will now have to review their incentive rules. We are not persuaded that the 15 percent will result in less profit shifting and base erosion for developing countries. That is left to be seen. And we look forward to the economic impact analysis that each country should be encouraged to do in order to determine whether or not they will realize the revenue intake.

MNP: And finally, I will just say that one of the things that developing countries would be interested in is a periodic review of the rules after a period of time to just see how much we are benefiting from the two-pillar solution. So that is just some of the concerns that come to mind.

CG: Thank you. I think there's a lot there. There's a lot to be discussed. Abdul, if we could turn to you for a moment. This inclusive framework has been touted as a win for multinationalism . . . multilateralism, I'm sorry. And one of the first times that developing countries have had a seat at the table. But it's still an OECD project in many ways and it is still run by the OECD. And you have been vocal on this, and I really would like to hear your opinion. Do you think the OECD is the right organization to be leading this type of effort? And are you concerned that as we move forward with additional negotiations and implementation, the developing countries' concerns won't receive the consideration that they should because the process is being controlled by the OECD?

Abdul Muheet Chowdhary: Thank you Cara for the question and for the invitation. And it's an honor for me to share the panel with my distinguished panelists. So as for your question, I think the slip up which you made, that this was a win for multinationals and then you said multilateralism. I think the first slip was correct actually. The two-pillar solution can be seen as a win for the multinationals rather than multilateralism actually. And this really goes to the heart of the question as to whether − why this is the case. Why is it that this is a win for the multinationals? And this is because the institution that has produced these rules, the OECD, is an institution which has been created to really promote the interests of its member states, which are the richest countries in the world. And this is in the OECD convention in Article 1A.

AMC: That it is devoted to maximizing the prosperity of its member states. So it's really no surprise that the rules which it would prepare are going to be towards that objective. In fact, Article 6 of the OECD Convention also says that decisions have to be made by consensus, and the only way they can go to a vote is again by consensus. So basically, if any one OECD member state says that there should be no voting, then there will be no voting. And they can really derail, or go against, what the OECD wants to do. So fundamentally, this is an organization which has to really, A, promote its members’ interests, B, each and every one of those member's interests, even if they're small countries, like the tax havens, basically.

AMC: So now, from this kind of an organization, which by law is devoted towards these objectives, what kind of rules can you expect? And historically, we see that the rules which have come out are rules which have been made − in this case, look at the model convention. The model convention of the OECD gives primacy to the resident's countries from − which are capital exporting countries. The transfer pricing guidelines attribute profits to on the base of functions, assets and risks. Now, any subsidiary, which is going to have more functions, more assets, and more risks will obviously be a very well-resourced subsidiary and is likely to belong to developed countries, which are going to get the profit attribution.

AMC: And we see this history even now with the two-pillar solution. Pillar 1 affects very few companies and a very small portion of the profits of these companies, and pillar 2, which is a topic for today, basically tells the developed countries that, "Do you want to collect the minimum taxes? If you don't, then we'll give a small piece of the leftovers to developing countries." And now with the model rules, we can see that even that has become unlikely because they've introduced something called the Qualified Domestic Minimum Top-up Tax, which was to appease the tax havens like Ireland and Netherlands and so on by basically ensuring that they could have the first, first go, by having a minimum of the 15 percent. And then this would be deducted from the income inclusion rule, which is that amount of tax which should go to the headquarter countries. And finally whatever's remaining, in the rare case that that possibility does arise, would go to the developing countries.

AMC: So, if you look at the structure of the institution, the kind of rules it has produced, it is absolutely clear that the OECD is not the big institution which should be leading this process. Then there's one other aspect. If you talk about a global solution for a global problem, then the solution should be prepared by everybody involved. The inclusive framework doesn't have all countries, and then the functioning of the inclusive framework is extremely opaque. I mean, in theory, the plenary of the inclusive framework is supposed to take decisions. But until today, does anybody know what decisions have been taken in the plenary? I don't know if this information is public. And the developed countries keep telling the developing countries of our transparency, accountability, et cetera. But where is the transparency? Where is the accountability in the functioning of the inclusive framework of the OECD itself?

AMC: The people deserve to know what their representatives are arguing for, and if this is completely opaque and all you get is the end product, then how is this an accountable institution? Coming to the aspect of accountability, the whole two-pillar solution has been created at the mandate of the OECD and the G-20, but what about the rest of the world? I mean, it's these two groups which have mandated the OECD to come up with a solution for the whole world, so what about the countries which are not involved?

AMC: So this, I mean, is a very, very unworkable, unsustainable setup. And for viewers who may not know, the developing world through the Group of 77 has for decades demanded that the United Nations should be the institution where these rules are made. It's a genuinely global institution, and for various reasons, it is the one which should make these rules, and even from an efficiency perspective, it's much more likely that countries are going to accept a solution which they were involved in formulating. What is going to happen to countries which are not part of the inclusive framework? How will they implement amount A? I mean, half of Africa has, is just not a part of the inclusive framework, how are they going to implement pillar 1, and what if they don't? I mean. So there are all of these questions which, which make it very, very unsustainable for the OECD to be the organization which is in charge of providing these solutions.

CG: Thank you. My slip of the tongue played in perfectly to your answer. I totally did not plan that. Carlos, if I could turn to you and ask what areas of the package are still up for negotiation, and you know, going along with the process as it is, what areas can developing countries still influence, and how strongly do you feel their influence will be felt?

CP: Interesting question, Cara. In fact, most relevant issues have already been set at the time of the October agreement last year. So the remaining issues are merely technical details on how to put the flesh into the bones around those building blocks. That means that there will be no. . . . A huge, huge impact in the terms of the concerns that have already been expressed by many developing countries, even most of them have signed the agreement in October. And for instance their work [inaudible] regarding the mandatory and abiding dispute resolution mechanism for amount A, and also for issue related to amount A. That has been already set. So, details are still pending for the finishing or in order to determine how the panels will be integrated, and which will be the status of the decision taken by the arbitration panel and the like, but noting that it would be binding and obligatory for developing countries.

CP: Similarly for the rule of the pillar 2, the law of rules have already been explained before and there is a rule out there, so the income inclusion rule will apply first and then the undertaxed payments rule, that was another concern. So that has already been set. There will be no time for re-opening that debate. So the remaining work is purely technical and not much collection is pending on that. And so, my conclusion here is that developing countries have already made a decision on the terms of the agreement and those terms have already been set at least on the way the global solution has been shaped.

CG: So let's turn to a question that came in from the audience that kind of follows up on this. Why does the OECD think that this additional complex system is truly needed? And should an extension of the applicability of [controlled foreign corporation] rules not suffice and I would open that up to anyone who would like to answer.

AMC: Well, I'll take a go if . . . Well, CFC rules are really for countries which are hosts to multinationals. So unless you've got an MNE which is headquartered in your country, CFC rules are not very helpful for you. But that being said, so for many developing countries which are capital importing countries, this CFC approach will not be helpful but another approach. . . Other approaches, in fact, can be helpful but there are alternative minimum taxes which are either taxes on a percentage of gross revenues or taxes on book profits which are much easier to implement, have a proven track record, and which can be implemented by developing countries which will give them the minimum tax, whatever their domestic corporate statutory rates are, which are often higher than 15 percent to 25 percent to 35 percent, in fact, in the case of many African countries. So these unilateral measures are much easier for them to implement and would avoid all of the complexity in pillar 2 and also giving up the right to tax.

AMC: Any developing country which agrees to pillar 2 is basically saying that they want to give the first right of collecting tax to the headquarter country and then if the . . . For whatever reason, they don't want more tax revenues, which is very unlikely, then they would be willing to accept the remainder. So in that sense, yes, it's an interesting question as to why a solution is needed. You can argue it both ways, developing countries are better off with unilateral measures but the CFC aspect is only . . . Will be confined only to capital exporting countries.

CG: Interesting.

MNP: Can I just add something to that quickly as well, Cara, to what Abdul said which . . . And every [inaudible] intervention. I believe the concept . . . Well, I can't speak to why the rules have had to . . . Were made so complex but I think the initial idea, there was good intention and I believe that there is still the intention to ensure some amount of equity in the global landscape. The [digital services taxes] which were seen as unilateral measures, it was said that they were creating some amount of distortion in respect of digital services tax. And also it was generally agreed that market jurisdictions should also be given an allocation right. And so I think that this multilateral approach would be the best approach. I don't think that anybody expected the rules to be so complex but I feel that that was part of their deliberations as well.

CG: Marlene, we had one other question and I was kind of interested about this earlier. So let's say once we get everything done and the OECD rules get incorporated into domestic law, can that national law then be changed unilaterally or does it require something else?

MNP: Well, the means by which . . . You're speaking about pillar 2 now.

CG: Yes.

MNP: So pillar 2 is going to be based on the model rules and so countries will be encouraged to adopt those model rules. I don't think that it has any implications for sovereignty which means that countries, I think, will be able to make adjustments to their laws. The fact that, for example, the GLOBE rules are by a common approach which means that you can introduce them whenever you wish and where the STTR is a treaty rule so that's a different thing but I don't think that the intention is to impact in any way a country's sovereign power to change their laws. However, if the laws are changed, I think it is anticipated that they will maintain the basic design and the structure and will not negatively impact the multinational enterprises. There would be no discrimination, they will have to adhere, I think, to the basic principles and structure of the pillar 2 solution.

CG: Okay. Ama, can I turn to you? We had another good audience question. So I'm kind of running with some of those. How important is the passage of changes to [global intangible low-taxed income] in the U.S. to incentivize developing nations to implement the OECD tax agreement? Do you have any insight or thought on that?

NAS: That is a good question. So if I'm understanding correctly, the question posed is asking to what extent did GILTI serve as a sort of inspiration for developing countries to impose similar rules, is that correct?

CG: I think that's right. And then also, if there are changes needed to GILTI in the U.S. that would incentivize developing nations to sign on to the inclusive framework.

NAS: From where I stand, I'm not sure that GILTI presents any sort of − or rather, that changes are needed to GILTI to influence developing countries to join the two-pillar solution simply because GILTI is its own element. It's its own beast. And of course, it has definitely influenced the OECD two-pillar package. But I think when developing countries are thinking about whether or not they want to join the package, they're thinking about what revenue will they be able to obtain and whether or not they will be able to stop base erosion or rather blunt base erosion and profit shifting in their jurisdictions. But as for the extent to which GILTI has encouraged developing countries to perhaps think about implementing their own regimes, I don't really have a good answer on that. I think, from where I stand, it seems as though that package might be a bit too advanced or early for developing countries to really consider implementing on their own or devising on their own.

CP: May I jump in and make a comment complementing the response? In my views, the GILTI has shown the world that there is a sovereign decision by one state, in this case the U.S., to impose a tax on the nontax revenue income derived by the multinational that is, at least based in that state. So the world has said, why not do it under our global solution, and that's why at least 137 jurisdictions agreed to build up to where the income inclusion is more or less based on the GILTI. And an important issue coming to developing countries, the income inclusion rule is not expected to increase collection in developing countries because most ultimate parent entities of multinationals are not based in developing countries. So the GLOBE rules will lead to very few collections in developing countries, while developed countries will get the highest share of that. However, and it has been recognized in the global solution, jurisdictions are not restricted to implement the income inclusion rule. Also for those multinationals that are based in those jurisdictions, where the threshold is below the 750 million euros.

CP: So in that scenario, it is an encouragement for developing countries to think about this idea of shaping an income inclusion rule that may allow to increase collection for those jurisdictions regarding multinationals that are based there, even though they are not as big as those that are called by the GLOBE rules.

CG: Interesting. Carlos, to follow up with you, or honestly to anyone, one question that has gotten several yes votes from our chat features. Do you think the domestic top-up tax will help developing countries?

CP: Pardon me.

CG: The question was do you think the domestic top-up tax will help developing countries?

CP: I said before the entire pillar 2 is not expected to help developing countries. The only interesting tool there is probably the subject-to-tax rule, which is a bilateral tax treaty rule. Its implementation is not as broad as the GLOBE rules because it requires a paired into a bilateral tax treaty to agree on the inclusion tax. The subject-to-tax rule is a kind of minimum standard, but only for those developed countries or jurisdictions that have effective tax rates below the minimum tax rate. So not everyone is obliged to implement it but only those zero or low tax jurisdictions, when other developing countries so request. So the top-up tax that will be implemented in the subject-to-tax rule, as explained before, is top-up at 9 percent on gross basis. So if you take into account that most bilateral tax treaty between developing and developed countries, tax rates along with in source taxation are normally around 10 percent. It doesn't leave too much room for obligation because it will only apply for those payments that the tax will be already provided for zero or a lower level of taxation allowing an increase in the source taxation up to 9 percent.

CP: So in my views on the way the subject-to-tax rule is being developed, it is not so broad, and not all covered payments or not all payments are covered. There is a decision to be made regarding capital gains and realized by a transfer of assets alongside the same group. It has not been defined yet, but it will make a difference. But anyway, the scope is not as broad as expected. And I don't imagine that the top-up tax will leave too much collection for developing countries, noting that the GLOBE rules that are topped up to 15 percent will not be implemented in most developing countries.

AMC: If I could just . . . unless Marlene wanted to go first in which case I will . . .

MNP: Oh, thank you. Abdul. Yes, I agree with Carlos, Cara. And I think the other concern as well in relation to the STTR is the trigger rate is 9 percent for the covered payments, and it refers . . . The STTR refers to covered payments which are interest royalties and . . . and there's a broad . . . very broad category as well, but primarily interest and royalties. Developing countries are concerned that that scope is too narrow because we would like to see services fees included in that scope. The other concern as well, is that if you're in a situation where you're negotiating because it is treated bound, and they treat the partner with whom you are negotiating as a low or no tax, it could well be that they decide that they are just going to move the covered payments to 9 percent.

MNP: And so therefore, that is before entering into negotiations, so therefore, the STTR, there's nothing now, to trigger a request for the . . . For you to . . . For the STTR to take effect, and so therefore, STTR in that sense would not be beneficial to a developing country. There's also a concern as well, that we are here talking about a minimum of 15 percent, but what happens if the 15 percent becomes the norm, because one of the concerns . . . Because the initial language was that the 15 percent was . . . Would be at least 15 percent. Well, that has changed, and so I think that is a concern for developing countries as well, which have a much higher tax rate, and which . . . Who would have preferred to have seen the rates move to higher than 15 percent. So I think those are just some of the concerns, just to supplement what Carlos was saying.

AMC: Just to add to that, again, as mentioned, article one and article six of the OECD convention really say that they're devoted to their member's interests, so we can see Ireland's interests in this case, one out on having a low rate, which even went above the U.S.'s interests of 21 percent. I would also like to add that the only aspect of pillar 2 which is helpful for developing countries, the undertaxed payments rule, has really been kicked to the bottom. In terms of implementation, it will be implemented in 2024, and really after everything, amount B . . . After everything is done, then the undertaxed payments will come into effect. And it is riddled with exemptions, if the MNE has started going abroad recently, there are exemptions. And then in Article 2.5 of the model rules, you can see that there are two specific subset rules which really make its application very, very unlikely in the vast majority of cases, the first condition says that if the ultimate parent entity which controls the subsidiary, has something in between, then the rule doesn't apply, which is really going to be in the majority of the cases.

AMC: So that's going to make the undertaxed payments rule's application, extremely unlikely and if it doesn't, then it's a good bonanza for corporate restructuring so that they can ensure it doesn't happen. And where in the extremely unlikely case, it doesn't happen, and the undertaxed payments rule can apply, then whatever is left over after the allocations to the ultimate parent and the intermediate parents, then the tiny percentage will be attributed to developing countries and given that there are long chains of ownerships often in these corporate structures, you can only imagine the tiny dregs which will trickle down to the developing countries.

CG: It's interesting. Ama, could you talk a little bit about digital services taxes? We've gotten a few questions on that. Do you think the new rules will go far enough that DSTs will be permanently withdrawn?

NAS: Oh, that is a good question. I think it's not the extent to which the rules will go far enough to which DSTs will be withdrawn because, of course, every country that signed on to the two-pillar package agreed that it would . . . That they would remove their DSTs. I think the real danger here lies in how headquarter jurisdictions would react to countries who have not signed on to the package but have maintained unilateral measures or countries that have not signed on and have created them, or perhaps maybe countries that decided to drop out of the package, if that even becomes a thing. And that makes me think of a question that we had actually received on Twitter a few days ago, and the individual had asked if we could speak to perhaps how the new U.S. foreign tax credit regulations might impact developing countries or countries that decide to implement digital services taxes.

NAS: And just as a background on that, the U.S. Treasury recently finalized some regulations that basically create this new attribution requirement for when multinationals or countries are determining whether foreign taxes are creditable under the U.S. system, and that state that taxpayers can only claim credits for foreign taxes that conform to international norms, meaning that the activity basically must have a sufficient connection to the foreign country. So we all know that digital services taxes kind of push those international taxing norms. So there's a question as to whether or not they would be creditable. And under these new regs, the U.S. would compare foreign laws against U.S. laws to determine whether those laws meet the character of income under U.S. standards.

NAS: So I think that's a new way for the U.S. to play hardball, as far as digital services taxes are concerned and the individuals who posed this question mentions that there are several . . . There could be some really important impacts. One, we could see U.S. multinationals deciding to perhaps scale back the amount of business that they're doing in countries that have these taxes. On the other hand, we could perhaps see U.S. companies increasing the amount that they're charging in these jurisdictions, or on the other hand, it also could make U.S. multinationals less competitive against foreign companies if they are raising their prices. So I think that's what's important with regards to the DST debate.

CG: Excellent, thank you. Marlene, one topic I wanted to get to was mandatory dispute resolution, so there's the provision in a pillar 1 that provides for mandatory dispute resolution with respect to at least transfer pricing and some other disputes. And I was hoping you could speak to the need for dispute resolution and also address why this has been opposed by some countries.

MNP: Okay, well, I think in any tax dispute, certainty is important. I think that is owed to the taxpayer because especially when you're dealing with multinationals that have a lot at stake, it is important for them to be certain in terms of their investment and what is likely to happen if there is a dispute. So I think in any tax system, you need a good dispute resolution mechanism.

MNP: I think the problem here is that the rules are way too complex. First of all, it really only affects amount A, I think the . . . Right, I think it's just amount A that it relates to, and so that's the first thing. The other thing as well is that there is an elective mechanism that has been put in place as a kind of minimum threshold. And that is for countries that have no [mutual agreement procedure] cases or low MAP cases and their deferral . . . There has been a deferral of their action 14 peer review. Now, we are concerned about that because what it requires is that not only do you have to have low or no MAP cases but there is a conjunctive and your review has been deferred, and so developing countries could well find themselves in a situation where you have never had a MAP case.

MNP: Jamaica has never had a MAP case for example, okay. And there's a capacity building issue there as well, okay, if you have never been engaged in MAP cases because there is a process, it's a negotiating process, but you could find yourself in a situation where you don't have a MAP . . . You don't have any MAP cases so you meet that threshold but your action peer review has not been deferred, your action 14, sorry, peer review has not been deferred, and so therefore you could find yourself enveloped in what is a very complex structure of resolving disputes. Some countries have also raised the issue of conflict with constitutions, their constitutionality and whether or not their own judicial system will be impacted by the binding nature and the mandatoriness of the dispute resolution mechanism. So those are just some of the concerns that we have.

NAS: And just to add to . . .

AMC: Go on, please.

NAS: I was just going to say, just to add to Marlene's points, a few months ago, I had crunched the numbers on how many countries might be eligible for this separate dispute binding regime and I think it came to about 55 countries in the whole world, which is not that many.

AMC: Yeah, Cara, I just wanted to make one point on the previous point made by Carlos on digital service or was it on digital service taxes. I just want to reiterate especially to . . . For the perspective of developing countries. So far in the two-pillar solution, whatever has been agreed is nonbinding. I repeat, nonbinding. Everything is political. Pillar 2 is optional, pillar 1 is a political agreement. It will . . . The forthcoming multilateral convention has to be signed, even then it's not binding. It will only be binding after ratification by the parliaments. So developing countries still have time to really consider whether this agreement, which is going to give them a very, very small amount of money which they will have to work extremely hard to not collect is worth doing in the first place and the parliaments and the legislatures should really hold . . . Should scrutinize this agreement when it comes to them for ratification whether it's worth doing this because once they agree, then they'd be likely stuck for about 30 to 40 years.

AMC: And it's also important that the multilateral convention has a clause which allows for review of the entire package because it's . . . In any law, there is a possibility to amend the law and that's the same for international law. You talk about the BEPS multilateral instrument. I think article 33 has a provision where the conference of parties can call for a review. So even pillar 1 should have some sort of a provision where any aspect can be reviewed in the future. The threshold, the quantum of amount A, the revenue source and goods and whatever it is. It cannot be a final deal which will never change till the end of time, you know that is something which is not likely to be sustainable, countries are more likely to walk away if that provision is not there at all.

AMC: So again, these two messages, one, digital service taxes or other alternatives to pillar 1 countries have full tax sovereignty, they can and should go ahead with whatever will give them and their people the maximum revenue − especially developing countries, which are desperately poor and in the middle of this pandemic, many of them have become even poorer. It's really questionable whether they should give up this lucrative source of revenue in exchange for something which is hardly going to give them anything, so I just wanted to make that point.

CG: Thank you. Carlos, in our last minute or so, I wanted to ask you what could happen if developing countries are unable to implement pillars 1 and 2. It kind of goes to Abdul’s − There's a lot of . . . There's a lot of speculation, there's a long road left to go. What's gonna happen if developing countries really truly can't or choose not to implement the two pillars?

CP: It is very interesting to see what would have next what . . . Which developing country is in a position to decide to implement this and then to be in a position to efficiently implement it. As Marlene has said there are many challenges around this global solution, so it won't be easy. But in the case there is a failure in implementation, a jurisdiction can sign out from the multilateral convention because it is not satisfied with the outcome and then it will be open for an internal decision on whether to arrange or disarrange really for the first time any additional service that not necessarily need to be alongside the rules that are in pillar 1. Pillar 2 is not mandatory so every jurisdiction is free to implement it or not or decide to stop implementing it once it enters into force.

CG: Thank you. Well, I have to say that went by really fast and I have a ton more questions that I would have loved to have asked you. I genuinely appreciate all of you taking the time today to share your insights and your knowledge and I'm sure our viewers do as well. So, thank you very much and I hope everyone has a wonderful rest of their day.

NAS: Thank you.

AMC: Thank you.

 

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