The OECD has published for consultation until 2 December 2019 a paper on proposals for ‘pillar two’ of its international solution for taxation of multinational enterprises in the digital economy.
While the pillar one proposals looked at the allocation of taxing rights between jurisdictions, pillar two is concerned with the global anti-base erosion (GloBE) proposal, a set of rules for ensuring minimum effective rates of tax. Unlike the pillar one paper published in October, which focused on a ‘unified approach’, the pillar two paper seeks further input on specific design aspects of the GloBE proposal.
The GloBE proposal under pillar two is built around the two main elements of ‘income inclusion’ and a ‘tax on base-eroding payments’.
The income inclusion element consists of:
an ‘income inclusion rule’ to tax the profits of a foreign-controlled entity or branch if those profits were subject to a low effective tax rate; and
a ‘switch-over rule’ to permit jurisdictions to switch from an exemption method to a credit method where profits attributable to exempt foreign branches, or income derived from foreign immovable property, were subject to an effective tax rate below the minimum rate.
The tax on base-eroding payments incorporates:
an ‘undertaxed payments rule’ to deny deductions, or impose source-based taxation (such as withholding tax), for payments made to related parties that are not subject to tax at or above a minimum effective rate; and
a ‘subject to tax rule’, which would complement the undertaxed payments rule by subjecting payments to withholding or other taxes at source and denying treaty reliefs for income not subject to tax at or above a minimum effective rate.
The paper stresses that no agreement has yet been reached on the actual effective minimum rate, although a rate of 15% is included in some examples for illustrative purposes only.
The three specific aspects of the proposal on which the OECD is particularly interested to receive input are:
using financial accounts as a starting point for determining the tax base, combining the financial accounts of a group’s ultimate parent entity with agreed adjustments to take account of permanent and temporary differences, which could include carry-forward of excess taxes and tax attributes, the use of deferred tax accounting, and multi-year averaging;
combining income and taxes from different sources (blending) to arrive at the effective tax rate, taking either a worldwide approach (aggregating total foreign income and total foreign tax), a jurisdictional approach (aggregating on a jurisdiction-by-jurisdiction basis), or an entity approach (calculating income, taxes and effective tax rates of each individual group entity); and
possible carve-outs and thresholds for the GloBE rules, which could include regime-based exclusions, sector carve-outs, size or turnover-based carve-outs, and de minimis rules.
A public consultation meeting on the proposal will be held on 9 December at the OECD in Boulogne. Further public consultation is expected on the mechanics and operation of the undertaxed payment rule and the nature and scope of the subject to tax rule, once the OECD inclusive framework has developed a clearer outline of these rules.
In the US, the Information Technology Industry Council (ITI), a trade group representing companies, including Amazon, Apple, and Facebook, has responded to the OECD’s pillar one proposals with a call for withdrawal of unilateral measures, such as diverted profits taxes and digital service taxes. ’The current OECD process must be explicitly predicated on removal of these measures in exchange for a global solution’, the ITI said in its submission. ‘Countries cannot be given license to cherry-pick elements of these policies to achieve bespoke outcomes’.
The OECD has published for consultation until 2 December 2019 a paper on proposals for ‘pillar two’ of its international solution for taxation of multinational enterprises in the digital economy.
While the pillar one proposals looked at the allocation of taxing rights between jurisdictions, pillar two is concerned with the global anti-base erosion (GloBE) proposal, a set of rules for ensuring minimum effective rates of tax. Unlike the pillar one paper published in October, which focused on a ‘unified approach’, the pillar two paper seeks further input on specific design aspects of the GloBE proposal.
The GloBE proposal under pillar two is built around the two main elements of ‘income inclusion’ and a ‘tax on base-eroding payments’.
The income inclusion element consists of:
an ‘income inclusion rule’ to tax the profits of a foreign-controlled entity or branch if those profits were subject to a low effective tax rate; and
a ‘switch-over rule’ to permit jurisdictions to switch from an exemption method to a credit method where profits attributable to exempt foreign branches, or income derived from foreign immovable property, were subject to an effective tax rate below the minimum rate.
The tax on base-eroding payments incorporates:
an ‘undertaxed payments rule’ to deny deductions, or impose source-based taxation (such as withholding tax), for payments made to related parties that are not subject to tax at or above a minimum effective rate; and
a ‘subject to tax rule’, which would complement the undertaxed payments rule by subjecting payments to withholding or other taxes at source and denying treaty reliefs for income not subject to tax at or above a minimum effective rate.
The paper stresses that no agreement has yet been reached on the actual effective minimum rate, although a rate of 15% is included in some examples for illustrative purposes only.
The three specific aspects of the proposal on which the OECD is particularly interested to receive input are:
using financial accounts as a starting point for determining the tax base, combining the financial accounts of a group’s ultimate parent entity with agreed adjustments to take account of permanent and temporary differences, which could include carry-forward of excess taxes and tax attributes, the use of deferred tax accounting, and multi-year averaging;
combining income and taxes from different sources (blending) to arrive at the effective tax rate, taking either a worldwide approach (aggregating total foreign income and total foreign tax), a jurisdictional approach (aggregating on a jurisdiction-by-jurisdiction basis), or an entity approach (calculating income, taxes and effective tax rates of each individual group entity); and
possible carve-outs and thresholds for the GloBE rules, which could include regime-based exclusions, sector carve-outs, size or turnover-based carve-outs, and de minimis rules.
A public consultation meeting on the proposal will be held on 9 December at the OECD in Boulogne. Further public consultation is expected on the mechanics and operation of the undertaxed payment rule and the nature and scope of the subject to tax rule, once the OECD inclusive framework has developed a clearer outline of these rules.
In the US, the Information Technology Industry Council (ITI), a trade group representing companies, including Amazon, Apple, and Facebook, has responded to the OECD’s pillar one proposals with a call for withdrawal of unilateral measures, such as diverted profits taxes and digital service taxes. ’The current OECD process must be explicitly predicated on removal of these measures in exchange for a global solution’, the ITI said in its submission. ‘Countries cannot be given license to cherry-pick elements of these policies to achieve bespoke outcomes’.
