Our International Tax Group is analyzing the pillars of a new international corporate tax system that is facing major hurdles.
- Pillar one: a new tax law in the digital world
- Second pillar: a global minimum tax rate of 15%
- The road (blockade) in front of us
On October 8, 2021, 136 countries reached a long-awaited agreement on a two-pillar plan to revise and modernize the international corporate tax system in order to meet the challenges of digitization. The OECD / G20 Inclusive Framework on Base Erosion and Profit Shifting published a statement detailing the agreement and an implementation plan.
Treasury Secretary Janet Yellen released a statement on the same day praising the deal, stating that it was “a unique achievement for economic diplomacy” and that “virtually the entire world economy has decided to race to the bottom.” break up”. on corporate taxation. “
Even if the OECD / G20 Declaration is an important development after four years of haggling and stalled negotiations, there is still much to be done. On October 13, 2021, the group of 20 (G20) ministers and central bank governors met in Washington, DC and issued a statement in support of the two-pillar plan outlined in the OECD / G20 declaration. The G20 heads of state and government are expected to adopt the plan at a summit in Rome in late October 2021. Implementation of key aspects of the deal is slated for 2023, but expected and unexpected obstacles could hamper these plans, including potential hurdles in the US Congress.
Put simply, the first pillar will: (A) create a new tax law that redistributes 25% of profits over a margin of 10% for the 100 or so largest and most profitable multinational companies (MNEs); and (B) provide a fixed rate of return for basic marketing and sales activities in the market jurisdictions. The first pillar raises previous proposals that focused on “customer-centric businesses” and “automated digital services” and breaks out two industries: commodities and regulated financial services.
The first pillar gives countries a new right of taxation, known as Amount A, to ensure that multinational corporations tax part of the residual profits generated from activities in those countries, even if they do not have a sufficient taxable physical presence under applicable law.
In general, MNEs with a worldwide turnover of more than 20 billion fall into a market country if a multinational in the scope of the market country has at least 1 million.
For MNEs falling within the scope, 25% of residual profit (profit exceeding 10% of sales) is allocated to market countries with Nexus using a sales-based distribution key. The revenues are fed to the end market countries in which goods or services are used or consumed, whereby detailed procurement rules have to be developed. A safe haven for marketing and sales profits limits the residual profits allocated to the market country by amount A, the details of which have yet to be determined.
Amount A raises some outstanding doubts related to double taxation. For example, if a US multinational (a repurchase country company) with an A allocation to another country (a market country) does not receive relief from the United States to compensate for that A allocation, that relinquishing US American multinational corporations pay taxes twice on such an amount. While the OECD / G20 Declaration provides that double taxation of profits assigned to market jurisdictions is subject to mandatory dispute settlement mechanisms and is eliminated by either the exemption or credit method, it does not specify the details of the mandatory dispute settlement and relief mechanisms, including the type and type Wise discharge is granted and which country grants discharge.
The OECD / G20 Declaration contains an implementation plan for amount A. As part of the plan, amount A will be implemented through a multilateral convention (MLC) that will be developed and open for signature in 2022, with amount A coming into force in 2023. MLC will be a multilateral framework for all acceding jurisdictions, regardless of whether a double taxation agreement currently exists between these jurisdictions. If a double taxation treaty is already in place between the parties to the MLC, that double taxation treaty will remain in effect and govern cross-border taxation outside of Amount A. The MLC requires all parties to abolish all taxes on digital services and other similar measures that apply to all businesses whether under the first pillar or not, and to undertake not to introduce such measures in the future.
The first pillar also introduces Amount B, which represents a fixed rate of return for basic marketing and sales activities in market jurisdictions and is intended to reduce transfer pricing and other disputes. The OECD / G20 declaration provides that the application of the arm’s length principle to basic marketing and sales activities in Germany will be simplified and streamlined and that this work will be completed by the end of 2022.
Put simply, the second pillar introduces a global effective minimum tax rate of 15%.
The second pillar consists of two interlocking domestic rules (together the Global Anti-Base Erosion (GloBE) Rules) and a contract-based rule:
- The first domestic rule is the Income Inclusion Rule (IIR), which imposes an additional tax on a parent company on the low-taxed income (i.e.
- The second domestic rule is the Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment unless the low-taxed income of a constituent entity is subject to the IIR.
- The contract-based rule is the Subject to Tax Rule (STTR), which allows source states to impose limited withholding tax on certain related party payments that are subject to taxation below a minimum rate of 9%. The STTR is credited as a covered tax in accordance with the GloBE rules.
The GloBE rules apply to a multinational company that is sustainably and significantly involved in the economy of a market state, regardless of its physical presence in that state. These rules apply to a multinational company that meets the threshold of 750 million. The OECD / G20 Declaration provides that a country is free to apply the IIR to an MNE based in its country, even if the MNE does not meet the threshold .
MNEs just starting international activities will be temporarily excluded from the UTPR. MNEs with no more than 50 million
The GloBE rules provide for a spin-off that excludes income that is 5% of the value of property, plant and equipment and payroll. This outsourcing will be introduced gradually – in a transitional period of 10 years, the excluded income amount will be 8% of the value of property, plant and equipment and 10% of wages, with an annual increase of 0.2% for the first five years and 0, for the first five years. 4% decrease for property, plant and equipment and by 0.8% for wages and salaries over the past five years. The GloBE rules also provide for a de minimis exclusion for those jurisdictions in which the multinational company has revenues of less than EUR 10 million and profits of less than EUR 1 million.
The OECD / G20 Declaration provides for the conditions under which the US GILTI regime will coexist with the GloBE rules to be taken into account in order to ensure a level playing field. The interactions between the GloBE rules and tax changes to the US GILTI regime and the tax base erosion and abuse tax under consideration by the Biden administration and Congress also need to be assessed.
The OECD / G20 declaration contains an implementation plan for the second pillar. In general, the goal is for the second pillar to come into force in 2022 and to come into force in 2023 and the UTPR to come into force in 2024, with effect on the STTR, developed by the end of November 2021. A multilateral instrument is to be developed by mid-2022 to facilitate the implementation of the STTR in relevant bilateral agreements. An implementation framework is to be developed by the end of 2022 at the latest to enable a coordinated implementation of the GloBE rules.
The road (blockade) ahead
There are many questions as to whether the implementation plan in the OECD / G20 declaration is too optimistic. The EU will probably implement pillars one and two without too much difficulty after the former objectors to the EU inclusive framework have signed the OECD / G20 declaration. While the non-participation of four dissenters in the Inclusive Framework – Kenya, Nigeria, Pakistan and Sri Lanka – is unlikely to significantly hinder the near global implementation of the first and second pillars, other factors could prove to be obstacles to implementation.
In the United States, a legal debate could follow before legislation can be initiated. At a congressional committee hearing in September 2021, Senator Pat Toomey (R-PA), who opposes the OECD / G20 declaration, told Yellen that an important part of the tax deal would require a formal deal approved by a two-thirds majority in the Senate Biden’s government advised that alternative means may be used. It remains to be seen how and whether the first and second pillars can be implemented. In particular, the United States has entered into binding international agreements, including the North American Free Trade Agreement, without a formal treaty.
The scope of the issues to be dealt with in the implementation plan itself is appalling. In addition to the above, rules need to be developed according to which multinational corporations are treated as levies on profits that are reallocated under amount A. Definitions of the carveout industries (extractive and regulated financial services) as well as rules for adapting the MNE financial data to calculate the tax base for the first and second pillars. Regardless of any obstacles that may arise, there are many large and small questions to be answered before the first and second pillars can be implemented, and there is still a lot of work to be done.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.