OECD Proposes a Minimum Global Corporate Tax
On November 8th, the OECD issued a consultation document with its suggestions vis-à-vis the establishment of a global minimum tax rate.
As reported by International Tax Review’s Danish Mehboob, the OECD is looking for “feedback on simplifications, thresholds, carve-outs, and exclusions from the suggested pillar two rules,” and hopes to receive the public’s opinion on this proposal up until December 2nd.
Pillar Two, also known as the Global Anti-Base Erosion (GloBE) Proposal, generally aims “to develop rules that would provide jurisdictions with a right to ‘tax back’ where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.”
Rajendra Nayak, a tax partner at Ernst & Young in India, believes these “proposals could lead to significant changes to the overall international tax rules under which multinational businesses currently operate.”
“The proposals are intended to advance a multilateral framework that achieves a balanced outcome, limiting the distortive impact of direct taxes on investment and business location decisions,” Nayak added.
Via this consultation process, the OECD wants to receive feedback on the following three specific topics: 1) “the use of financial accounts as a starting point for determining the tax base;” 2) “the extent to which an MNE can combine income and taxes from different sources in determining the effective (blended) tax rate on such income; and;” 3) “stakeholders’ experience with, and views on, carve-outs and thresholds that may be considered as part of the GloBE proposal.”
More generally, Pillar Two’s proposed rules to tackle base erosion and profit shifting include:
1) “An income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate;”
2) “An undertaxed payments rule that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;”
3) “A switch-over rule to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum rate; and,”
4) “A subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.”
Pundits React to the OECD’s Pillar Two Proposal
One particular point that will spur plenty of discussion is the use of accounting standards for taxation purposes.
According to Eelco van der Eden, a Partner with PwC in the Netherlands, “there has been renewed interest in accounting standards for a possible basis for taxation. That has been off the table for many years, but now it is front of mind again.”
The OECD has proposed relying on the International Financial Reporting Standards (IFRS), which is based on the International Accounting Standards, to set up a common tax base.
Furthermore, Anna Burchner, Arran Bhatiani and Hannah Jones of CMS Cameron McKenna Nabarro Olswang LLP believe Pillar Two is “not as developed” as the OECD’s Unified Approach (Pillar One).
In an article for Lexology, they write: “In the Pillar Two proposals, the OECD has not yet confirmed which countries will be granted rights to the top-up tax and how collection is intended. It has also not been confirmed how the OECD will deal with policy conflicts where certain countries may elect to tax businesses in a way that may not be compliant with the OECD’s current proposals.”
Additionally, as explained by Isabel Gottlieb for Bloomberg Tax, certain firms expect the OECD to either formulate “the rules using the same blended approach as a provision from the 2017 U.S. tax overhaul—the new minimum tax applied to global intangible low-taxed income, or GILTI—or [mark] the existing U.S. rules as acceptable if it chooses a different approach.”
Barbara Angus, Ernst & Young’s Global Tax Policy Leader, said, “If the OECD produces a set of rules that are different than the GILTI rules, and other countries implement those rules, what will be really important to U.S. businesses is that it is recognized that the GILTI regime imposes a minimum tax, so that that income is treated as having met the minimum tax requirement and cannot be subject to another country’s minimum tax rules.”
What are your thoughts on Pillar Two and where it’s headed?