Tax Notes chief correspondent Stephanie Soong discusses how countries are approaching implementation of the OECD’s two-pillar corporate tax reform plan and the future of the OECD after Pascal Saint-Amans’s departure.
This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: pillars' progress.
We're checking in again on the OECD's two-pillar project to reform the taxation of multinational companies. Despite ongoing challenges, the inclusive framework on base erosion and profit shifting (BEPS) continues to make progress toward a final design for implementation.
I'm joined by Tax Notes chief correspondent Stephanie Soong to talk more about where things stand now and where we expect them to go. Stephanie, welcome back to the podcast.
Stephanie Soong: Hey, thanks for having me.
David D. Stewart: Before we really dive into things, could you give our audience a bit of a refresher on what the two pillars are?
Stephanie Soong: Yes. The two pillars refers to a plan that the OECD brokered among 137 countries. It was meant to follow up on action 1 of the OECD base erosion and profit shifting project, which dealt with addressing the tax challenges of digital economy. The two pillars was basically a overhaul of the international tax system. It does two separate things.
Pillar 1 would revise profit allocation and nexus rules to give market jurisdictions a new taxing rate, called amount A, over some portion of multinational corporate residual profits that are tied to sales in a market jurisdiction. That's where the consumers are located.
Pillar 1 also has amount B. That provides a fixed return for baseline marketing and distribution activities in market jurisdictions in line with the arm's-length standard. It also includes dispute resolution and prevention mechanisms for tax certainty for amount A and issues related to amount A.
Pillar 1 is widely seen as part of the plan that'll address the taxation of digital activity. It also requires countries to withdraw unilateral measures, like digital services taxes, that they may have adopted in the absence of a multilateral solution to tax digital activity and also prevents countries from introducing new such measures.
At the heart of pillar 2 are the the global anti-base erosion (GLOBE) rules, which are the income inclusion rule or the IIR and the UTPR, which is also known as the undertaxed payments or profits rule. This is a system of top-up taxation to make sure that companies do pay a 15 percent no tax rate.
Pillar 2 also includes the subject-to-tax rule. That's a treaty-based rule under which source jurisdictions can impose a top-up withholding tax on some related-party payments that are taxed below a nominal rate of 9 percent.
As I've talked about before on this podcast, nearly all of the 140 some members of the inclusive framework had agreed in 2021 that they would adopt these two pillars.
David D. Stewart: This project has been going on for quite some time now. I understand there's been some major changes since we last talked about it in July. Could you tell us what's been going on?
Stephanie Soong: Yes. Not so much major changes of the project itself, but for the team behind it.
Everyone knows Pascal Saint-Amans was a director of the OECD Center for Tax Policy Administration (CTPA). He unexpectedly announced in September that he would step down as the director of the Centre for Tax Policy and Administration. At the end of October, he decided he would take a job elsewhere. Now, he's at the Brunswick Group, which is a global advisory firm.
Grace Perez-Navarro, who was formerly deputy director, is now the director of the CTPA. That's kind of interesting.
Pascal had been in this role for over 10 years and was the one who really got the BEPS project and the BEPS 2.0 project going. I asked him, "Why now?" Because it seems like a lot of people were asking him "Why now? It sounds like you're going to jump, because it's sinking."
But he insisted that it was because he had been thinking about leaving for a while, but hadn't had a chance. Now that the pillars seemed to be pretty stable and the work is still going, he felt it was time to go and get fresh blood in.
So Grace Perez-Navarro will be director until March next year. Then she'll retire, and it's still unclear who will take over as director after she leaves.
David D. Stewart: All right. For getting into the details, why don't we start with pillar 2? As I mentioned, we talked about this back in July. What have been the updates since then?
Stephanie Soong: At the OECD, the secretariat and Working Party 11 are continuing to work on what they call a GLOBE implementation framework. They hope to get that out by the end of the year. This framework includes things like safe harbors, administrative guidance, standardized return forms, things that multinational enterprises, in scope, would need to comply with these rules once countries start adopting them. The OECD is also trying to get out the subject-to-tax rule — I think by the end of the year as well, if I'm not mistaken.
Meanwhile, countries are starting to move toward implementation, but it feels like "Who's going to jump in the pool first?" No one really has adopted a global minimum tax at all except for the United States. Other countries are in varying stages of implementation. Some have started consulting on implementing pillar 2 in their respective countries. Others have produced draft legislation.
The EU comes to mind as the first to have a draft directive on the table. On November 17 the United Kingdom had their autumn statement. They had been consulting on how to implement pillar 2, and the chancellor of the exchequer, Jeremy Hunt, announced that the United Kingdom was indeed going to implement pillar 2 rules starting with the GLOBE.
He announced during the autumn statement that the United Kingdom would legislate for the IIR in the spring finance bill 2023. It also would adopt a qualified domestic minimum tax, which countries are allowed to adopt. These minimum taxes would take effect before the income inclusion rule. It's an optional measure that countries can adopt under the GLOBE model rules.
The United Kingdom announced that it would also produce UTPR legislation. The rule takes effect no later than the accounted period, beginning on or after December 31, 2024, which really means the UTPR would take effect in 2025.
There are countries moving. It's just a matter of who's going to go first.
David D. Stewart: Before this project even got started, the United States had implemented a sort of minimum tax in the global intangible low-taxed income rules. Since we last talked, the United States has adopted a second sort of minimum tax, the book minimum tax, in the corporate alternative minimum tax as part of the Inflation Reduction Act. How does that factor into all of this discussion on pillar 2?
Stephanie Soong: I think a lot of the hope for the United States implementing pillar 2 rules really kind of rode on the reforms on GILTI. Because the IIR was sort of inspired by GILTI, and countries were hoping that the United States would be able to amend the GILTI so it's more in line with the IIR.
But because now we've got this corporate AMT in place, the question is how will it work with the IIR under the GLOBE framework? How are other countries going to treat it? Is it going to be what they call a qualified IIR in line with the rules? Is it going to be another controlled foreign corporation regime?
Kim Clausing recently said at a conference it could be a bridge toward eventual GLOBE IIR adoption for the United States, but it's still really unclear what's going to happen now.
David D. Stewart: Going beyond the United Kingdom and United States potential implementation of this, what are we seeing in other countries? How are they approaching pillar 2?
Stephanie Soong: A lot of countries, like Switzerland, Canada, Singapore, and Jersey, are all consulting on how their respective countries should adopt the GLOBE rules.
The only block of countries that has actually produced any kind of draft legislation that is complete is the EU. The EU produced a draft directive in December 2021 on the GLOBE rules. But they've had a lot of trouble getting unanimity on this directive, because the EU needs all member states to be on board with a tax directive. Hungary is still a holdout.
That has been a bit of a problem for the commission and for the EU Council, because they really want to get pillar 2 and GLOBE off the ground. There are five EU countries, including Germany and France, who said that they would go ahead anyway if Hungary continued to hold out and do an enhanced cooperation type of thing. Enhanced cooperation means that a group of member states can go ahead with a tax directive as long as a minimum of nine are on board. We'll have to wait and see what happens with that.
Meanwhile, the United States actually announced recently that it would cancel its treaty with Hungary, citing Hungary's opposition to the GLOBE directive, the pillar 2 directive in the EU, and that has riled up some Republican lawmakers in the United States. A bunch of Republican lawmakers actually sent a letter to Treasury saying that the United States should reverse its stance on canceling the treaty with Hungary.
Never mind the fact that the Hungary-U.S. treaty is going to be canceled. It's going to be canceled anyway, because there is a pending new Hungary-U.S. treaty that has not been approved yet in the Senate.
A lot of threads to unspool here, because pillar 2 is really the one pillar that has been ramping up in terms of action.
David D. Stewart: Well, speaking of action, what are we expecting next on pillar 2?
Stephanie Soong: I'm waiting for the OECD to release their implementation framework for the GLOBE rules as well as the STTR (subject-to-tax-rule). I am just waiting to see which other countries are going to be the first to pick a punch, really. We'll see what happens.
David D. Stewart: All right. Well, then — turning to pillar 1, what's been happening since we last talked about that?
Stephanie Soong: Pillar 1 isn't getting as much attention these days as pillar 2, just because pillar 1 seems to be more of a far-fetched prospect in terms of implementation, which is fair because a lot of the rules have not been finalized yet, even though countries have agreed to implement it. So the OECD has been in hard at work producing public consultation documents for draft amount A rules.
In July, they produced a public consultation draft on amount A rules and held a public consultation meeting in September in Paris. Then they produced another public consultation document on draft administration rules and tax certainty aspects of amount A and issues related to amount A. That consultation just closed, and comment letters have been published. I don't know when that consultation meeting will happen, but I would expect that to take place at some point.
Meanwhile, G-20 finance ministers and leaders continue to push ahead with pillar 1 and pillar 2. Recently, the G-20 leaders had a meeting in Bali. In their declaration, they reaffirmed their commitment to both pillars and actually called on countries to sign on to the multilateral convention that's needed to implement the pillar 1 amount A rules when those rules are ready.
The OECD is currently working on producing that multilateral convention. They're hoping to get it ready for countries to sign by mid-2023. Meanwhile, we're also waiting for other, what they call a building block from amount A, including a document on unilateral measures. This document is expected to discuss what kind of unilateral measures countries will be expected to withdraw once those amount A rules are in place.
David D. Stewart: Now, you alluded to this before, but pillar 1 does seem to be a much heavier lift than pillar 2. What can we expect if it fails?
Stephanie Soong: Well, we can expect lots of DSTs, probably. DSTs are like the boogeyman in the room. All countries don't want DSTs, especially the U.S. Republicans and Democrats can agree on one thing and that's that digital services taxes are bad. If pillar 1 fails, if amount A fails, then I'd probably bet that those DSTs will be back in full force, because a lot of countries are fed up with seeing what they see as digital giants and companies with digital services really just escaping tax. So they're going to probably act on unilateral measures.
That brings the question up about whether we'll see more trade disputes over digital services taxes. And already, we're seeing some action toward that direction, because the USTR, the Office of the U.S. Trade Representative, has been consulting on the Kenya trade deal and with the head of public consultation.
Some trade groups have been bringing up this idea again that as a condition of the new Kenya-U.S. trade agreement, they should drop their DST. So now, we're seeing trade and digital taxation creep back together and convene. I would expect more trade tensions to restart if amount A fails.
Also, the U.K. Public Accounts Committee is supposed to hold a hearing on the U.K. DST on December 8, just questioning HM Revenue and Customs and Treasury about what the plan is for withdrawing these taxes if pillar 1 amount A comes into effect.
So, you know, DSTs for everybody.
David D. Stewart: Well, then, stepping back for the bigger picture — is there any sense of when this entire project is going to be finished?
Stephanie Soong: This is a very good question. I would guess that this will never end, which is good for me, because I can write about it all day long. Seriously, I don't know if there is an end in the project.
I guess, in the near future, the dates I can see maybe for the major parts of the project to be finished is 2024, 2025 maybe. But I think that it's going to be an ongoing process. I don't know if there's going to be a real end date in sight, unless the G-20 decides that they want to scrap everything. I don't think it's going to happen. But I think it'll be with us for a long time to come.
David D. Stewart: Well, that's great, because I love having you on the podcast. And so we're going to get to keep doing that for the foreseeable future. Stephanie, thank you for being here.
Stephanie Soong: Oh, thanks for having me.