Pillars to build on

The road to global unanimity on any matter is rarely smooth, as the OECD has discovered in its efforts to reform international taxation and achieve a consensus on the rates paid by multinational enterprises (MNEs) regardless of their location in the world.

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) has been examining global corporate tax fairness for almost a decade. The result was a two‑pillar proposal: Pillar One dealing with revised profit allocation and nexus rules and Pillar Two relating to global minimum tax rules.

However, when the OECD presented its first proposals in 2019, it hit difficulties almost immediately, with the US responding that it would retain its own international taxation rules rather than accepting those of the Inclusive Framework.

What ensued was a global tug‑of‑war. The US maintained it would need ‘safe harbour’ provisions to allow it to opt out of the Pillar One rules, and numerous countries implemented their own interim digital services taxes (DSTs) while an international accord was awaited. In turn, this led to arguments about preferential treatment and trade sanctions. Meanwhile, the other G7 countries (Canada, France, Germany, Italy, Japan and the UK) tried to find a compromise that would work for both their US counterpart and the Inclusive Framework.

It was hoped that an accord would be reached by the end of 2020, but the lack of agreement was set back further by the pandemic as governments worldwide turned their attention to the fight against COVID‑19.

Forward progress

The change of US presidential administration at the beginning of 2021, however, signalled a shift in the conversations. At the February meeting of the G20 finance ministers, the new US Secretary of the Treasury announced that Washington would no longer insist on the safe harbour provision and committed to ‘engage robustly’ in the multilateral process for reaching compromise.

In June, the G7 reached agreement on international tax reform, requiring multinational companies to pay a minimum tax rate of 15 per cent in each country where they operate. Finally, in July, the OECD announced that the majority of the Inclusive Framework’s 139 member countries agreed on the two‑pillar plan.¹

‘This is a historic achievement, as we have the first real change to the allocation of taxing rights in 100 years,’ says Pascal Saint‑Amans, Director of the OECD Centre for Tax Policy and Administration. ‘It puts an end to the uncertainty and instability in the international tax system that would have negatively affected all stakeholders.’

Emily Deane TEP, Technical Counsel at STEP, comments: ‘STEP applauds the work of the OECD and G20 in welcoming all interested countries and jurisdictions that are ready to commit to the BEPS programme. The intention is clearly that corporate structures should be transparent and must not be used as tools of aggressive tax planning strategies to move income from one jurisdiction to another. To date, there has been significant progress on what is acknowledged to be a deeply contentious and complex issue.’

At the time of writing, the agreement was only days old. As it stands, Pillar One reallocates some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether the MNEs have a physical presence there. It will apply to MNEs with a global turnover above EUR20 billion and profitability above 10 per cent.

Pillar Two seeks to put a floor on competition over corporate income tax through the introduction of the aforementioned 15 per cent global minimum corporate tax rate. The minimum tax rules would apply to MNEs with global revenue above EUR750 million, allowing jurisdictions to impose a ‘top‑up’ tax on a parent entity related to income incurred by a subsidiary in a low‑tax jurisdiction or to refuse any associated tax deductions.

It is expected that those countries that have implemented a temporary DST will repeal it as and when the global framework officially comes into play. Geoff Cook TEP, Chair of the STEP Public Policy Committee,² remarks: ‘The Biden administration’s agreement to a global accord has re‑energised the OECD’s pillar proposals. It seems probable that any US commitment to a global agreement will be predicated on the withdrawal of existing DSTs.’

‘With the US on board for at least the minimum tax, there is now momentum within the OECD to implement changes,’ agree Chris Ireland TEP, Chair of STEP Canada’s Board of Directors 2021–2022, and Ian Lebane TEP, Deputy Chair of STEP Canada’s Tax Technical Committee.³ ‘It is still early in the process, though, and the devil will be in the detail. It remains to be seen how long it will take to work out those details.’

Hurdles ahead

The OECD now aims to move to an ambitiously rapid schedule: the remaining elements of the Inclusive Framework’s proposals, including the implementation plan scheduled for 2023, will be finalised in October 2021.

But while a first consensus has been reached, the negotiations have some distance to travel. Ireland and Lebane point out that agreement in principle is a different proposition entirely to countries estimating the full economic impact of the propositions. ‘Although the potential for increased tax revenues looks attractive, what are the other economic consequences?’ they ask. ‘Participating countries will need to consider whether key businesses will look to move to non‑participating countries.’

The Bahamas, Bermuda and Switzerland have agreed to the two‑pillar plan, but have expressed reservations about what it may mean for smaller jurisdictions and their financial services sectors. Nine Inclusive Framework member countries have so far rejected the consensus altogether: Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, Peru, Sri Lanka and St Vincent and the Grenadines.

‘Ireland has already made the case for legitimate tax competition,’ notes Cook. ‘It, and other EU Member States, will clearly engage constructively with the OECD and the European Commission to seek an agreement that meets the needs of all parties.’

He adds that other countries may have concerns beyond business competition: ‘Taxation has historically been a national competency, in particular as concerns setting tax rates. Building consensus among smaller countries that lack the economic advantages of major economies may prove challenging, as some will see this as a ceding of national sovereignty and self‑determination.’

Nonetheless, Saint‑Amans remains positive about the impact the project is going to have: ‘It is further evidence of the strength of the international tax architecture. We will now move quickly to finalise the agreement along with a detailed implementation plan.’