One argument against pillar two in comments from trade and industry associations as well as individual taxpayers to the OECD is that the GloBE proposal can overlap with international tax rules to risk double taxation and multiple taxation for multinational companies. The GloBE rules may clash with the existing international tax framework given that the effects from the OECD’s earlier BEPS project have not been fully realised yet.
“We have concerns of launching pillar two ahead of completing an assessment on the effectiveness of the BEPS project under Action 11 to measure the impact,” said representatives from the Alliance for Competitive Taxation (ACT), which represents over 40 multinational companies, including Google.
“If GloBE is adopted then consideration should be given to either modifying or eliminating overlap with measures under the BEPS project,” the alliance said.
Taxpayers across industries expect simple, routine transactions such as energy-efficient capital investments that receive deductions and tax credits to face challenges from tax authorities under the proposed rules, especially in fast growing industries such as renewable energy and financial technology.
Tax professionals stress compliance simplicity and tax certainty on pillar two when it comes to the interaction of GloBE rules with its individual component Amounts A, B, C, and D as well as with other rule sets such the OECD BEPS project and certain unilateral measures.
Will Morris, deputy global tax policy leader at PwC, said taking small, carful steps to an OECD solution is better than accepting wider changes to international tax: “Why not test new approaches out in a couple of stages, starting small, learning from mistakes, until we are ready to cover the whole world?” he asked.
Taxpayers agree with this conceptually in their comments to the OECD on pillar two where many argue for starting with high thresholds to capture activity from the largest multinationals in order to determine the impact of the GloBE proposal before widening the scope to include more companies.
“We don’t have to change everything now, but we do have to change some things,” said Morris.
US tax professionals embrace pillar two
The US widely supports pillar two because it aligns well with the global intangible low taxed income (GILTI) provisions in US tax reform. The GILTI rules introduced a radical formulary approach to investment into the US tax code.
Steven Mnuchin, secretary of the US Treasury, wrote to the OECD on December 2 2019 that the US ‘fully supports’ a GILTI-like pillar two solution, but has ‘serious concerns’ about pillar one and its potential departure from the arm’s length principle and nexus norms in the international tax framework.
Similarly, US taxpayers such as Procter & Gamble also support a GILTI-like pillar two given that they have been complying with the GILTI regime since January 1 2018. There are arguments to treat the GILTI regime as a qualified income inclusion rule under a finalised pillar two.
“The US GILTI regime should be permanently grandfathered as a tax regime compliant with the GloBE proposal’s goals of limiting base erosion and profit shifting,” said Stephen Comstock, director of tax and accounting policy at the American Petroleum Institute (API).
“US multinational groups subject to the GILTI regime should not be subject to the GloBE rules of other countries. This approach can be implemented by establishing a whitelist of qualified income inclusion regimes,” added Comstock.
Implementation concerns
Tax professionals told ITR that if the OECD continues following the an ordered form of the GloBE rules under pillar two then effective, cross-border dispute resolution mechanisms, whether mandatory arbitration or otherwise, should be required across all countries to avoid double taxation and make the international system work.
Mismatches in the domestic adoption of GloBE rules and dispute resolution mechanisms across countries will overcomplicate the OECD Inclusive Framework’s solution to adjust international tax rules to capture digital economy activities.
Tax professionals fear countries may implement pillar two but reject dispute resolution tools that are necessary to curb double taxation and multiple taxation from potential overlap with existing international tax rules such as those derived from the BEPS project.
“It is essential that effective dispute prevention and resolution mechanisms for addressing the application of the new GloBE system be put in place. These mechanisms need to work on a multilateral basis,” said Barbara Angus, global tax policy leader at EY.
“The best way to prevent disputes is to ensure that the rules are clear and easy to comply with and administer by taxpayers and tax administrations,” she added.
The discussion around tax simplicity and tax certainty to an OECD solution, which were the focus at the consultation on pillar one on November 21 2019 will continue at the meeting on pillar two on December 9 in Paris.
