The global tax policy process pursued by the OECD / G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has been calm since mid-July, when G-20 finance ministers convened approved the July 1 Inclusive Framework statement summarizing revised features of the Pillar One and Pillar Two plans that would reallocate taxing rights for certain large multinational corporations and create a global minimum tax regime. The lack of news does not mean, however, that the Inclusive Framework has stopped working on the project or that it does not intend to present a more comprehensive proposal to the G-20 finance ministers in October this year. , as promised in the 1 statement.

Two other countries signed the July 1 declaration in August, namely Barbados and Togo, bringing the total number of supporters to 134 jurisdictions. That leaves six holdouts: Ireland, Hungary, Estonia, Kenya, Nigeria and Sri Lanka. Of these, five are of particular importance: three because they are EU Member States, which raises doubts about how the EU could implement the agreed proposals in a timely manner, and two because they are African leaders in international economic policy.

The July 1 declaration leaves a number of important design features such as blanks to be filled through political negotiations among the countries of the Inclusive Framework. What has been agreed so far on the first pillar includes:

  • It will apply to multinational enterprises (MNEs) with gross sales of at least 20 billion euros ($ 23.8 billion) globally and a profit margin of at least 10% (presumably calculated on the basis of net profit before tax on gross income), except for MNEs in financial services and mining.
  • A portion of the aggregate profits of a multinational enterprise within the scope, in the order of 20-30% of their profits above 10%, will be allocated for tax purposes among the countries whose multinational enterprise derives its benefit. minus € 1 million ($ 1.18 million) in revenue (or, in the case of countries with a GDP of less than € 40 billion ($ 47.4 billion), at least 250 000 euros ($ 296,000) in turnover). The amounts allocated are designated “Amount A”.
  • All existing digital service taxes (DST) and “other relevant similar measures” will be repealed.

Regarding the second pillar, the Inclusive Framework agreed that all member countries will enact comprehensive minimum tax legislation that is consistent with an approach that includes:

  • an effective corporate tax rate of at least 15% (subject to the possibility of a higher rate being agreed by all member countries before mid-October) based on income from financial statements, with certain adjustments, MNEs with annual sales of at least 750 million euros ($ 889 million);
  • an income inclusion rule imposing an additional tax in the multinational’s home country on the low-taxed income of foreign affiliates, and a rule on under-taxed payments imposing an additional tax on low-tax foreign affiliates in cases where an income inclusion rule does not apply;
  • a tax liability rule in tax treaties ensuring that a certain level of tax is paid on specified payments;
  • country-by-country calculation of effective tax rates; and
  • an exclusion based on the substance of income equal to at least 7.5% of the book value of property, plant and equipment and payroll (reduced to at least 5% after the first five years).

The main unresolved questions that will need to be answered by mid-October include:

  • whether the US GILTI regime should be amended to require effective country-by-country rate calculations in order to be considered a qualifying income inclusion rule;
  • whether countries with DSTs can continue to apply them to MNEs that fall outside the scope of the first pillar;
  • whether new unilateral measures such as the digital tax proposed by the EU will be considered acceptable;
  • what types of safe harbor mechanisms will be available to MNEs with regard to the second pillar;
  • what will be the tax security mechanisms regarding the prevention and settlement of disputes;
  • will there be a safe harbor for marketing and distribution income to avoid double taxation under the first pillar; Will the agreed overall minimum tax rate be higher than 15%, as advocated by the United States and the five members of the Inclusive Framework who have not yet accepted the July 1 declaration be persuaded to accept a fuller agreement on pillars one and two?

Current indications are that we should expect to see, in mid-October, a fairly short document summarizing the Inclusive Framework agreement on pillars one and two, with those blanks filled to some extent. Work on the details of the rules and their implementation is expected to continue for several months thereafter.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Author Info

Jeff VanderWolk is a partner at Squire Patton Boggs (US) LLP. The opinions expressed are those of the author and do not necessarily reflect the opinions of the firm, its clients or any of its respective affiliates. This article is for general information purposes and is not intended to be and should not be construed as legal advice.

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