BEPS 2.0: Latest updates on Pillar I and II

Since our last post on BEPS 2.0 (published in February 2020) and despite the COVID-19 situation, the OECD has dedicated further resources and made significant progress on this topic as described by the OECD in their "Update on the Programme of Work since February 2020", included in the OECD’s Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors report published in July 2020.

The report refers to the widely publicized letter from the United States Treasury Secretary, dated June 12, 2020, suggesting a pause in the negotiations on Pillar I (see PwC’s Global Tax Policy Alert) until next year, i.e. after the presidential elections in the US. So far, this has not stopped the OECD’s detailed work on both Pillar I and Pillar II, but it does cast doubt on whether an agreement can be achieved by the end of 2020, or rather in the first half of 2021.

While the OECD is working on blueprint proposal documents for both Pillar I and II with the aim of publishing an updated version in October 2020, commentators are contemplating possible developments in the proposal and making hypotheses about the various aspects of the architecture, as well as certain technical parameters of Pillar I and Pillar II.

Pillar I

Amount A

• As presented in February 2020, the scope of Amount A will cover automated digital services (ADS) and consumer-facing businesses (CFB). It is expected that a detailed list of businesses will be provided in the October update.
  
  The expectation is that businesses operating in certain industry segments, such as natural resources, certain financial services, residential real estate, and shipping activities might not be included in the scope.
• The idea of applying a specific threshold only to revenues arising from foreign, in-scope business activities appears to be still on the table. This threshold will likely be applied in conjunction with the EUR 750 million gross revenues threshold, which is the threshold already applied for Country-by-Country reporting purposes.
• There is a general consensus that the tax nexus will be different for ADS and CFB businesses. The ADS nexus it is expected to be based purely on a revenue threshold, while the nexus for CFB might be based on revenue and other factors, such as the presence of a permanent establishment.
• With respect to the tax base, using profit before tax still appears to be the most pragmatic approach. That said, a certain degree of segmentation will probably be allowed to make sure that the correct tax based is captured. Some additional provisions might also be introduced with respect to the treatment of loss-carryforward amounts, which might have a significant impact on certain multinational groups.
• There is still a lot of uncertainty around the actual calculation of Amount A. Detailed calculation steps will likely be provided in the October update. That said, it appears that there is a certain consensus around the introduction of a cap on Amount A allocations to a single market, so that businesses potentially operating in extreme situations/conditions will not be excessively impacted by the application of an algorithm-based approach.

Amount B

• The definition of “basic marketing and distribution activities”, covered by Amount B, has not been clearly identified so far. It is expected that additional details will be provided in the October update.
• It is also reasonable to assume that a certain differentiation will be made in the baseline return in order to reflect the different levels of profitability in the various regions and/or sectors.

Pillar II

• In order to identify the scope of Pillar II, the existing Country-by-Country reporting rules appear to be a likely starting point, i.e. multinational groups with annual global revenues above EUR 750 million. In order to mitigate the impact of Pillar II, an alternative approach would be to set a higher threshold, e.g. EUR 1 billion, and then gradually reduce it to align it to the EUR 750 million threshold already in place for Country-by-Country reporting. A discretionary lower threshold applicable on a country level could also be an option to increase the chances of finding consensus on the revenue threshold to be applied, given that certain countries are calling for the application of a threshold lower than EUR 750 million.
• The scope, as outlined in previous OECD communications, is not limited to ADS and CFB businesses, but rather applicable to any multinational group. Some exceptions, yet to be defined, might be related to certain businesses operating in the financial sector (e.g. investment funds, pension funds, sovereign wealth funds), government bodies, international organizations and non-profit organizations.
• Similarly to Pillar I, it is expected that the tax base will be determined based on group financials, with limited adjustments.
• Considering that Pillar II might use some of the well-understood concepts from Controlled Foreign Corporation rules, it is reasonable to assume that the calculations will be done on a jurisdictional basis. In other words, the Global Anti-base Erosion (GloBE) tax liability will arise when the effective tax rate of a jurisdiction in which the multinational group operates is below the agreed minimum rate.
• It is also reasonable to assume that the Income Inclusion Rule (already outlined in the Public Consultation document on Pillar II published by the OECD in November 2019) will have priority over the Undertaxed Payment Rule. That said, it should still be clarified how the two rules will be coordinated, also across jurisdictions.

Blueprint documents for both Pillar I and II with more details on the architecture, including a significant number of key technical parameters, are likely to be published by the OECD in October for the G20/OECD Inclusive Framework meeting. These documents are expected to provide a clearer outline of the proposal. It is also anticipated that a consultation process will follow shortly thereafter.

Due to their political sensitivity, some major technical parameters of the proposals, such as the exact tax base for Pillar I or the global minimum tax rate for Pillar II, which will be key to determine the impact on taxpayers, would most likely only be decided at the final stage of development of the BEPS 2.0 framework, based on a political consensus. It will be interesting to see how the OECD will orchestrate consensus among the Inclusive Framework members and among countries with widely diverging interests.