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3. Q1 2023: Status of OECD’s Two-Pillar Solution for internatio...
Tax & AccountingJune 01, 2023
Q1 2023: STATUS OF OECD’S TWO-PILLAR SOLUTION FOR INTERNATIONAL TAXATION (BEPS
2.0)
By:Cindy Chan
Following significant activity at the end of 2022, the OECD has released
much-anticipated technical guidance on the Pillar Two rule on 2 February 2023.
Read the OECD press release here.
Wolters Kluwer in-house subject matter expert, Cindy Chan, takes you through the
progress made to date with BEPS.
The Base Erosion and Profit Shifting (BEPS) project was commenced in 2013 by
OECD and G20 countries to address fiscal losses caused by BEPS which is defined
by the OECD as: “tax planning strategies used by multinational companies to
exploit gaps and differences between tax rules of different jurisdictions
internationally to artificially shift profits to low or no-tax jurisdictions
where there is little or no economic activity”.
The BEPS project has resulted in the development of 15 actions in a 2013 action
plan to tackle base erosion and profit shifting, as well as the signing by a
majority of the members of a statement in October 2021 on a two-pillar approach
to address the tax challenges arising from the digitalisation of the economy.
These developments are further discussed below.
2013 BEPS ACTION PLAN
The OECD’s 2013 report Addressing Base Erosion and Profit Shifting set out an
action plan to address BEPS that detailed 15 actions. In 2015, the OECD released
a final package of tax reform measures including 13 final reports addressing the
15 Actions of the BEPS Action Plan. Since then, measures proposed in the final
reports have been adopted progressively by G20, OECD and other countries.
Australia has adopted many of the recommendations. For information on
developments concerning the BEPS project, see Australian Federal Income Tax
Reporter ¶620-223. The following table lists the 15 Actions of the BEPS project.
BEPS Action item Scope of the action item Action 1: Tax challenges of the
digital economy Identify the main difficulties that the digital economy poses
for the application of existing international tax rules and develop options to
address them. This includes a consideration of both direct and indirect
taxation. Action 2: Hybrid mismatch arrangements Develop model treaty provisions
and recommendations for domestic rules to neutralise the effect of hybrid
instruments/entities. Action 3: Controlled Foreign Corporation (CFC) rules
Develop recommendations regarding the design of CFC rules. Action 4: Interest
deductions and other financial arrangements Develop recommendations for
designing rules to prevent BEPS through the use of interest expense. Action 5:
Harmful tax practices Reform the existing framework on harmful tax practices.
Priorities are placed on: improving transparency, including compulsory
spontaneous exchange on rulings on preferential regimes and on requiring
substantial activity for any preferential regime. Action 6: Prevent treaty abuse
Develop treaty provisions and recommendations for domestic rules to prevent
inappropriately granting treaty benefits. Action 7: Artificially avoiding
permanent establishment (“PE”) status Develop changes to the definition of PE to
prevent artificial avoidance of a PE. Actions 8-10: Aligning transfer pricing
outcomes with value creation These action items considered the development of
rules to prevent BEPS for intangibles, risks and capital and other high risk
transactions. Action 11: Measuring/monitoring BEPS Develop recommendations
regarding the indicators of the scale and economic impact of BEPS and ensure the
tools are available to monitor and evaluate the effect of the actions taken to
address BEPS. Action 12: Disclosure of aggressive tax planning Develop
recommendations for the design of mandatory disclosure rules for aggressive tax
transactions. Action 13: Transfer pricing Develop transfer pricing rules to
enhance transparency for tax administrations. Action 14: Dispute resolution
mechanisms Develop solutions to address obstacles that prevent countries from
solving treaty-related disputes under the Mutual Agreement Procedure (MAP)
article of the relevant tax treaty. Action 15: Develop a multilateral instrument
(“MLI”) Analyse the tax and international law issues relating to development of
a MLI to enable jurisdictions to implement measures developed in the course of
the work on BEPS and amend bilateral tax treaties.
OECD STATEMENT ON THE “TWO-PILLAR SOLUTION” TO THE DIGITISATION OF THE ECONOMY
Australia was among the 136 countries and jurisdictions to join the Statement on
the Two-Pillar Solution to Address the Tax Challenges Arising from the
Digitalisation of the Economy in October 2021 to finalise a July 2021 agreement
between members of the OECD/G20 Inclusive Framework on BEPS. See OECD’s media
release International community strikes a ground-breaking tax deal for the
digital age (8 October 2021) and Highlights brochure: Two-Pillar Solution to
Address the Tax Challenges Arising from the Digitalisation of the Economy (8
October 2021).
The Two-Pillar Solution establishes a new framework for international tax and
detailed plan for implementation by 2023.
PILLAR ONE
Pillar One would reallocate some taxing rights over large multinational
enterprises (MNEs) from their home countries to markets where they have
businesses activities and earn profits, regardless of their physical presence.
These rules would apply to MNEs with global turnover above €20 billion and
profitability above 10%, with 25% of profit above the 10% threshold to be
reallocated. Regulated financial services and extractives (eg mining) would be
excluded.
Draft Rules for Nexus and Revenue Sourcing illustrate the framework for
identifying the relevant market jurisdictions from which revenue is derived for
Pillar One purposes. They were released in February 2022 to obtain public
comments and do not necessarily reflect consensus regarding the substance of the
document.
Draft Model Rules for Domestic Legislation on Scope under Amount A of Pillar One
were released in April 2022. “Amount A” of Pillar One serves to introduce a new
taxing right over a portion of the profit of large and highly profitable
enterprises for the market jurisdictions. The scope rules aim to determine
whether a Group will be in scope of Amount A. They are designed to ensure Amount
A only applies to large and highly profitable Groups and have been drafted to
apply in a quantitative manner, such that they are readily administrable and
provide certainty as to whether a taxpayer is within scope. The concept of a
Group is specifically prescribed for Amount A purposes and is broadly defined by
reference to an Ultimate Parent Entity (UPE) that is set at a level where
Consolidated Financial Statements are commonly prepared under financial
accounting standards.
On 11 July 2022, the OECD released a Progress Report on Amount A of Pillar One
containing a draft of the technical model rules to introduce a new taxing right
allowing market jurisdictions to tax profits from some of the largest
multinational enterprises. Another progress report was subsequently released on
6 October 2022. The OECD was interested to understand if any additional guidance
is required to improve application of the rules, and if any information is
missing or incomplete.
A public consultation document was released on 8 December 2022 on the main
design elements of “Amount B”, which provides for a simplified and streamlined
approach to the application of the arm’s length principle to in-country baseline
marketing and distribution activities, in order to enhance tax certainty and
reduce resource-intensive disputes between taxpayers and tax administrations.
On 20 December 2022, a public consultation document was released on the Draft
Multilateral Convention (MLC) Provisions on Digital Services Taxes (DSTs) and
other Relevant Similar Measures. The draft MLC has been released in order to
obtain public comments, but the substance of the document does not reflect
consensus.
The new multilateral convention to implement Pillar One was scheduled to be
finalised by mid-2023 for entry into force in 2024 under a revised timeline.
PILLAR TWO
Pillar Two would introduce a global minimum corporate tax rate of 15% to put a
floor on competition over corporate income tax for companies with revenue above
€750 million. It would include the following 2 interlocking domestic rules
(together the Global anti-Base Erosion Rules (GloBE) rules):
1. An Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity
in respect of the low taxed income of a constituent entity
2. An Undertaxed Payment Rule, which denies deductions or requires an
equivalent adjustment to the extent the low tax income of a constituent
entity is not subject to tax under an IIR
In addition, a treaty-based “subject to tax rule” (STTR) will protect the right
of developing countries to tax certain base-eroding payments, such as interest
and royalties, where they are not taxed up to the minimum rate of 15%. The STTR
will be creditable as a covered tax under the GloBE rules. Model rules to give
effect to the minimum corporate tax rate and the model treaty provision to
implement the STTR were to be developed by November 2021, to be effective in
2023. A multilateral instrument to facilitate the implementation of the STTR in
bilateral treaties was scheduled to be released by mid-2022.
Pillar Two model rules were released in December 2021 to ensure certain MNEs are
subject to a minimum 15% tax rate from 2023. They provide a template to assist
jurisdictions in implementing Pillar Two into domestic legislation, setting out:
* The Global Anti-Base Erosion (GloBE) rules to introduce a global minimum
corporate tax rate
* Treatment of acquisitions and disposals of group members, including specific
rules to deal with particular holding structures and tax neutrality regimes
* Administrative considerations and transitional rules for MNEs that become
subject to the global minimum tax
Detailed commentary and illustrative rules were released in March 2022. The
detailed commentary provides guidance on the interpretation and application of
the GloBE rules. It also explains the intended outcomes under the Rules and
clarifies the meaning of certain terms. The illustrative examples show the
application of selected articles in the GloBE rules to various fact patterns.
The full text of the model rules, as well as an overview, fact sheets and
frequently asked questions, are available on the OECD website. For an article on
the model rules, see CCH Tax Week article ¶76 (2022).
An implementation framework will be developed to support tax authorities in the
introduction and administration of the GloBE Rules. Public consultation is being
undertaken on the mechanisms required to facilitate application of the GloBE
Rules in a consistent and coordinated manner while minimising compliance costs.
On 20 December 2022, an implementation package was released, which included the
following:
* Guidance on safe harbours and penalty relief
* Public consultation document on the GloBE Information Return
* Public consultation document on Tax Certainty for the GloBE Rules
In addition, a new report on Tax Incentives and the Global Minimum Corporate Tax
was released on 6 October 2022 to assist emerging and developing countries
review the design of their tax incentives, as they prepare for implementation of
the GloBE rules.
Technical guidance was released in February 2023 to assist governments to
implement the GloBE rules. The Agreed Administrative Guidance for the Pillar Two
GloBE Rules clarifies the interpretation of the GloBE rules to ensure
coordinated implementation in domestic legislation and provide greater certainty
for businesses. The document includes guidance on recognition of the United
States’ minimum tax (Global Intangible Low-Taxed Income or GILTI) under the
GloBE rules and on the design of Qualified Domestic Minimum Top-up Taxes. The
document will be incorporated into a revised version of commentary on the GloBE
rules originally issued in March 2022. Further Agreed Administrative Guidance
will be released on an ongoing basis to ensure the GloBE rules continue to be
implemented and applied in a coordinated manner.
Cindy Chan
Senior Content Management Analyst, Wolters Kluwer Tax and Accounting, Australia
Cindy writes for numerous Wolters Kluwer publications in the tax and
superannuation practice areas, including CCH Australian Tax Week, Australian
Federal Tax Reporter, Australian Master Tax Guide and Australian International
Tax Agreements. She has also had several articles published in The Tax Institute
journals, The Tax Specialist and Taxation in Australia.
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MALAYSIA BUDGET 2025 - HR REPORT
On Friday, 18 October 2024, the 2025 Malaysia Budget was announced in
parliament. Wolters Kluwer provides a full coverage of all the major economic
and employment reforms and major updates impacting your clients and
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Learn More
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