OECD update on a two-pillar solution
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (i.e., BEPS Action plan) has agreed on a two-pillar solution to address challenges arising from the digitalisation and globalisation of the economy. There are couple of changes in the current version plan, e.g., Pillar One shall be designed for all MNEs companies fulfilling specific turnover and profitability criteria (see below), while in the previous version of the plan Pillar One was mainly intended for technological giants.
Already 132 countries have decided to join this two-pillar framework, the detailed implementation plan of which shall be finalised by October 2021.
Aims of the Two-Pillar plan
The aim of Pillar One is according to the OECD to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest multinational enterprises (MNEs), i.e., MNEs with global turnover above 20 billion euro and profitability above 10 percent. The goal of Pillar Two is to put a floor on tax competition on corporate income tax through the introduction of a global 15 percent minimum corporate tax rate. Pillar One should be relevant to about 100 companies, but Pillar Two applies to hundreds more MNES. It is expected that Pillar One will bring taxing rights on more than USD 100 billion of profit to each reallocated jurisdiction each year. The Pillar Two shall generate globally USD 150 billion of new tax revenues per year.
In Pillar One the special nexus rule will be used for the determination of whether a jurisdiction is qualified for profit allocation. The revenue will be to the end market jurisdictions where goods or services are used or consumed, it is expected that detailed source rules for some specific transaction shall be developed. In the Pillar One system the profit or loss of the in-scope MNEs will be determined by reference to financial accounting income with a small number of adjustments. The loss carry-forward regime will be in place in Pillar One. The standard methods (i.e., credit or exemption method) shall be available for the elimination of double taxation. It is expected that Pillar one will provide appropriate coordination between the application of the new international tax rules and the removal of all Digital Service Taxes and other similar measures. However, only general principles are currently discussed, and detailed implementation plan shall be prepared.
Pillar Two will be based on two domestic rules of individual countries:
1) an Income Inclusion Rule (IIR) imposing top-up tax on a parent entity in respect of the low taxed income of a constituent entity (i.e., CFC rule);
2) Undertaxed Payment Rule (UTPR) denying deductions or requiring an equivalent adjustment.
In addition, these two domestic rules, a treaty-based rule (also as Subject to Tax Rule (STTR) will apply. The STTR will allow source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate. The STTR will be creditable as a covered tax under the Global anti Base Erosion Rules (GloBE), which will have the status of a common approach. The GloBE rules will apply to MNEs that meet the 750 million euros threshold (the same threshold country-by-country reporting). A minimum rate used for the purposes of IIR and UTPR will be at least 15 percent, while the minimum rate for STTR form 7.5 percent to 9 percent.
The implementation plan shall be finalised in October 2021, and we will keep you updated. According to the OECD action plan it is expected that the model legislation, guidance, and a (new) multilateral treaty will be ready in 2022 and the implementation process will start from 2023.
The European Union also works on own solutions for tax challenges arising from digitalisation and globalisation of the economy. As we have already informed you the European Commission has prepared the New Tax Policy Framework, which had its schedule introduced in May 2021. Among others, the Digital Levy proposal was expected already in July 2021, however it was announced that finally the proposal will be delayed until October 2021, which will allow the European Commission to see details of the OECD agreement.