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OECD stuck on simplifying pillar two

The OECD is tinkering with technical challenges in its global anti-base erosion (GloBE) proposal under pillar two of the digital tax proposals as part of a public consultation.

The OECD’s latest consultation document, released on November 8, sets rules to maintain a minimum tax rate worldwide. The rules aim to address risks from structures that allow companies to shift profits to jurisdictions where they are subject to either no or low taxation. The organisation is seeking public input by December 2.

The OECD ‘Programme of Work on Pillar Two’ consultation document is seeking feedback on simplifications, thresholds, carve-outs, and exclusions from the suggested pillar two rules. There are already design issues that need to be addressed such as the determination of an appropriate tax base.

“There has been renewed interest in accounting standards for a possible basis for taxation. That has been off the table for many years, but now it is front of mind again,” said Eelco van der Eden, partner at PwC Netherlands.

International Financial Reporting Standards (IFRS) were built on top of International Accounting Standards, which could serve as a possible starting point for discussions ahead. The OECD consultation document suggests financial accounts as the gateway to coming up with a common tax base. The only countries without an IFRS mandate are the US, Japan, and China.   

Before the OECD opened the public consultation on its GloBE proposals to improve simplicity and minimise double taxation and compliance costs, tax professionals were concerned about keeping controlled foreign corporation (CFC) rules in addition to GloBE rules. This is part of the issue when it comes to finding an appropriate tax base.

“It might really overdo the whole thing,” said Wolfgang Schön, professor of tax law at the Max Planck Institute for Tax Law and Public Finance, about the combination of CFC and GloBE taxation.

Chief policymakers and tax professionals told ITR that if the OECD fails to implement such rules then the status quo will likely fall to unilateral measures that harm taxpayer interests and the expansion of the digital economy. The following fixed order of GloBE rules proposed by the OECD aim to curb the wider risk of such unilateral measures:

  • An income inclusion rule, which taxes foreign entity income if it is subject to an effective tax rate below the minimum rate;
  • Undertaxed payments rule denies deductions on source-based taxation if payments are not subject to a minimum tax rate;
  • Switch-over rule for tax treaties permits residence jurisdictions to switch from an exemption to a credit method where profit from a permanent establishment is subject to tax below a minimum rate; and
  • Subject to tax rule applies withholding tax to income at the source and adjusting eligibility for treaty benefits on certain income taxed below a minimum rate.

The proposed four rules focus on preventing double taxation by amending tax treaties and domestic rules to give jurisdictions taxing rights where other jurisdictions allow low levels of effective taxation.

However, the mechanics and operation of the undertaxed payment rule and the nature and scope of the subject to tax rule need to be further developed by the Inclusive Framework for a clearer outline of these rules to emerge.

Under the Programme of Work on Pillar Two, the OECD has requested input on three technical aspects of the GloBE proposal, including the extent a multinational company can combine income and taxes from different sources to determine effective tax rates on income. The OECD also opened the consultation to input on the wider implications and structure of pillar two.

Along with using financial accounts as a starting point for determining the tax base and understanding how companies combine income and taxes from different sources, the OECD is looking for input on what sectors to carve out and tax thresholds to consider under GloBE rules.

The OECD will follow the consultation with a meeting on December 9 to provide stakeholders an opportunity to comment on ongoing work, specifically the three technical design aspects.

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