The Organisation for Economic Co-operation and Development (OECD) has today set out further detail about the second limb of its programme of work intended to address the tax challenges of the digital economy. This programme is part of the OECD’s wider BEPS (base erosion profit shifting) project, which aims to prevent multinational businesses from taking advance of gaps between the tax systems in different countries in order to reduce their global tax bill. The scope of the project is wide as it will not be limited to the tech sector; its application will be felt by all large multinational companies.
The OECD is proposing to introduce a global minimum corporate tax rate, and the GloBE (Global anti-base erosion) proposal suggests a set of co-ordinated tax rules which would enable the implementation of this global minimum rate. The introduction of this would aim to ensure all international businesses are subject to the same minimum rate of corporate tax on their profits, therefore disincentivising them from entering into profit shifting arrangements. It would also have the secondary aim of discouraging developing countries from offering competitively low corporation tax rates or other tax incentives.
The four specific rules suggested by the GloBE proposal in order to enforce the minimum tax rate are as follows:
The income inclusion rule: companies will be taxed on income of their foreign branches/subsidiaries if the income in that other jurisdiction was subject to tax at a lower effective rate than the minimum rate.
The undertaxed payments rule: companies will be denied deductions for payments to related parties if that related party is not subject to the minimum tax rate upon receipt of the payment, or potentially will be required to account for withholding tax on such payments;
The switch-over rule: tax treaties will be modified to contain clauses permitting jurisdictions to swap from an exemption-based method of preventing double taxation to a credit method where profits attributable to a permanent establishment or immoveable property in another jurisdiction are not subject to the minimum tax rate. This would enable the enforcing jurisdiction to impose further tax on amounts that would previously have benefited from complete treaty protection if the second party to the treaty is taxing profits at less than the minimum rate; and
The subject to tax rule: this would complement the ‘undertaxed payments’ rule by imposing withholding taxes on payments which will not be subject to tax at a minimum rate, and by adjusting eligibility for treaty relief on certain kinds of income in those circumstances.
Clearly, these suggestions would constitute a significant change to the global tax landscape and there is a lot of detail to be thought through before implementation can be considered. A key question considered by the consultation is whether it will be possible to create a harmonised method of calculation for the tax base. Differences in the way jurisdictions currently calculate tax base would lead to inconsistent results if the minimum tax rate was introduced today, and so it is important that this is addressed. The consultation proposes using financial accounts to determine income and asks a series of detailed questions around the issues this may cause.
Another key area of uncertainty is whether there should be any exemptions or exclusions from these rules, and what (if any) thresholds should apply in respect of them. The OECD’s consultation document suggests that turnover-based thresholds should apply to bring only larger international groups in to the regime and that de minimis thresholds should apply to exclude smaller transactions. The current plan is for the tax to apply to all multinational groups (far beyond the original remit of digitalised businesses), but it may be that following the consultation responses there are carve outs for certain sectors. The consultation document considers this possibility, but acknowledges that this is more complex to implement than broader threshold-based exclusions.
There are still a lot of questions to be answered about how the ‘minimum tax rate’ will work, not least the crucial question of what that proposed rate will be.
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Towards a global minimum corporate tax rate?
Examining the OECD’s ‘pillar two’ proposals.
The Organisation for Economic Co-operation and Development (OECD) has today set out further detail about the second limb of its programme of work intended to address the tax challenges of the digital economy. This programme is part of the OECD’s wider BEPS (base erosion profit shifting) project, which aims to prevent multinational businesses from taking advance of gaps between the tax systems in different countries in order to reduce their global tax bill. The scope of the project is wide as it will not be limited to the tech sector; its application will be felt by all large multinational companies.
The OECD is proposing to introduce a global minimum corporate tax rate, and the GloBE (Global anti-base erosion) proposal suggests a set of co-ordinated tax rules which would enable the implementation of this global minimum rate. The introduction of this would aim to ensure all international businesses are subject to the same minimum rate of corporate tax on their profits, therefore disincentivising them from entering into profit shifting arrangements. It would also have the secondary aim of discouraging developing countries from offering competitively low corporation tax rates or other tax incentives.
The four specific rules suggested by the GloBE proposal in order to enforce the minimum tax rate are as follows:
The income inclusion rule: companies will be taxed on income of their foreign branches/subsidiaries if the income in that other jurisdiction was subject to tax at a lower effective rate than the minimum rate.
The undertaxed payments rule: companies will be denied deductions for payments to related parties if that related party is not subject to the minimum tax rate upon receipt of the payment, or potentially will be required to account for withholding tax on such payments;
The switch-over rule: tax treaties will be modified to contain clauses permitting jurisdictions to swap from an exemption-based method of preventing double taxation to a credit method where profits attributable to a permanent establishment or immoveable property in another jurisdiction are not subject to the minimum tax rate. This would enable the enforcing jurisdiction to impose further tax on amounts that would previously have benefited from complete treaty protection if the second party to the treaty is taxing profits at less than the minimum rate; and
The subject to tax rule: this would complement the ‘undertaxed payments’ rule by imposing withholding taxes on payments which will not be subject to tax at a minimum rate, and by adjusting eligibility for treaty relief on certain kinds of income in those circumstances.
Clearly, these suggestions would constitute a significant change to the global tax landscape and there is a lot of detail to be thought through before implementation can be considered. A key question considered by the consultation is whether it will be possible to create a harmonised method of calculation for the tax base. Differences in the way jurisdictions currently calculate tax base would lead to inconsistent results if the minimum tax rate was introduced today, and so it is important that this is addressed. The consultation proposes using financial accounts to determine income and asks a series of detailed questions around the issues this may cause.
Another key area of uncertainty is whether there should be any exemptions or exclusions from these rules, and what (if any) thresholds should apply in respect of them. The OECD’s consultation document suggests that turnover-based thresholds should apply to bring only larger international groups in to the regime and that de minimis thresholds should apply to exclude smaller transactions. The current plan is for the tax to apply to all multinational groups (far beyond the original remit of digitalised businesses), but it may be that following the consultation responses there are carve outs for certain sectors. The consultation document considers this possibility, but acknowledges that this is more complex to implement than broader threshold-based exclusions.
There are still a lot of questions to be answered about how the ‘minimum tax rate’ will work, not least the crucial question of what that proposed rate will be.
