Global minimum tax nears reality

It’s been a long time coming, but after years of analysis, position papers, discussions, negotiation, proposals and counter-proposals, the international tax arena is moving ahead toward goals set by international agreement years ago.

The European Commission recently released its proposal for the Pillar Two Directive, which would require large multinational corporations to pay a 15% minimum tax rate in jurisdictions where they operate, following the OECD inclusive framework rules. The planned implementation date is Jan. 1, 2023.

It all began in 2013, when the BEPS, or Base Erosion and Profit Shifting, project was initiated by the OECD, according to Monika Loving, leader of the international tax services practice at Top 10 Firm BDO USA.

“The OECD released its final BEPS report in October of 2015,” she said. “The final report had 15 action points around a wide variety of projects, which were intended to give governments around the world a framework for domestic and international tax rules. They were meant to address the shifting of profits between different jurisdictions, and align profits to match economic activities where business was taking place. And interestingly, the first action item was where we are today — taxation of the digital economy.”

At the time, it was determined that the digital economy was too difficult a topic to address immediately, so they focused on developing other action items, and they tabled Action One pending further discussion.

Over the course of 2015 through 2019, governments looked at other action items and implemented various points. Loving indicated: “They implemented much of the guidance from other action points. It was 2019 when they began to focus on the first action point, the digital economy. The work between members moved to a virtual platform, and in October 2020 they released a blueprint for a new global framework, BEPS 2.0.”

“It’s been a journey,” she observed. “As we came to the end of 2021, a number of milestones were reached on full agreement and endorsement of the OECD Inclusive Framework.”

The Pillar Two Model Rules, also referred to as the Anti-Global Base Erosion, or GloBE Rules, were released on Dec. 20, 2021. They are “designed to ensure large multinational enterprises pay a minimum level of tax on the income arising in each jurisdiction where they operate,” according to the OECD. The rules are meant to be models that provided a template for jurisdictions to implement into domestic law.

“As we look ahead to the rest of 2022, we’ll see a lot of more detailed information released on specific aspects of the plan,” said Loving. “Very detailed work needs to be done at the legislative and political levels.”

There are questions as to how the rules could be implemented in the U.S. A multilateral treaty would need to be ratified by two-thirds of the Senate, which might be difficult given current Republican opposition.

“Some sections of Build Back Better were intended to align U.S. GILTI (Global Intangible Low Taxed Income) rules to be in line with Pillar Two,” said Loving. “But that has stalled. Right now it’s unclear how or if Pillar One or Pillar Two will be implemented in the U.S.”

The next milestone in the coming months will be more guidance from the OECD around the coexistence of GILTI and Pillar Two.

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