After the initiation of the public consultation on Pillar 1 of the BEPS 2.0 framework was launched last month, the OECD today released its current thinking around Pillar 2 and has asked for public input.
To tackle remaining instances of international profit shifting to no / low tax jurisdictions, the OECD proposes a set of four rules, each of which shall be coordinated with each other. The rules are:
- an income inclusion rule – that would tax the income of a foreign branch or controlled entity if that income was subject to tax at an effective tax rate below a certain level;
- an undertaxed payments rule – that would operate by way of a denial of deduction or imposition of source based taxation for a payment to a related party that was not subject to tax at or above the minimum rate;
- a switch-over rule that would permit a residence jurisdiction to switch over from an exemption to a credit method where the profits attributable to a permanent establishment or derived from immovable property are subject to an effective tax rate below the minimum rate;
- 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.
The consultation document focuses on inviting comments on technical questions with respect to Pillar 2 – which is also known as the “Global Anti-Base Erosion Proposal” (GloBE) – including requesting input on the following three areas:
- the use of financial accounts as a starting point for determining the tax base;
- 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
- stakeholders’ experience with, and views on, exemptions and thresholds that may be considered as part of the GloBE proposal.
One of the most important and immediately interesting questions for most taxpayers will be the question of whether their group will fall within the scope of Pillar 2. Unfortunately, whilst the OECD notes that there may be exemptions and invites comments, there is no clear guidance yet on what those exemptions might be. What is clear, however, is that Pillar 2 will not only apply to digital businesses (anymore).
Of additional interest will be the question of how many, and which, countries will adopt the OECD Pillar 2 recommendations when they are finalized. Recent comments from the OECD suggest that whilst the OECD is hoping for widespread adoption of Pillar 1, they are expecting that adoption of Pillar 2 may not be so extensive.
As the OECD itself notes, the Pillar 2 recommendations represent a substantial change to the international tax architecture and as with Pillar 1, the OECD recommendations may be widely reported. Taxpayers are advised to follow the OECD’s work and to consider providing input - Heads of Tax are also advised to consider briefing management on the OECD plans.
BEPS 2.0: SIF publishes comments on the OECD plans
Switzerland’s State Secretariat for International Finance (SIF) yesterday published a short statement acknowledging the OECD’s work on BEPS 2.0.
SIF’s statement included the following comments on the implications of the BEPS 2.0 plans for Switzerland:
“Switzerland is working to ensure that taxation will, in principle, continue to apply at the place of the performance-related value creation, and that the share of profit to be allocated to the market jurisdictions remains in proportion to their share of value added, and hence moderate.
Switzerland is committed to tax sovereignty and fair tax competition, and considers that a binding minimum tax level generally hampers innovation and growth. Any minimum tax recommendations at international level must be moderate.
It is unclear what impact the new rules will have in practice, as the details have yet to be elaborated. However, it is to be expected that smaller, innovative and export-based economies with large numbers of profitable multinational entities – like Switzerland – will lose out on profit tax receipts.
The architecture of the proposals is to be defined by early 2020. A first set of binding decisions is due from the 130 countries in the OECD's Inclusive Framework in June of that year. The work is due to be completed by the end of 2020.”
