For anyone who follows international tax news, it is hard to miss the recent headlines regarding the OECD’s work on what has been referred to as BEPS 2.0., digital taxation, or global tax reform. Reports on “Pillar One” and “Pillar Two” are ubiquitous, not just in the tax press, but also in mainstream news outlets. But what do these proposals entail, and more importantly, what—if anything—can taxpayers do to prepare for these changes?
The Inclusive Framework, a network of 139 countries working on this issue under the auspices of the OECD, issued a statement on July 1 detailing the features of a two-prong proposal for international tax reform. In simple terms, the first of the two prongs—Pillar One—is an attempt to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest multinational enterprises. Pillar Two, on the other hand, introduces a global minimum corporate tax of at least 15% in an attempt to end the “race to the bottom,” the tax competition of jurisdictions’ lowering corporate income tax rates to attract business to their countries.
On July 10, the G-20 finance ministers endorsed the key components of the plan, and the OECD and the Inclusive Framework are now in the process of finalizing any remaining technical work, with an October 2021 deadline and a plan for implementation in 2023.
Who Will Be Affected?
Although the OECD has yoked Pillars One and Two together, the two prongs are unrelated and will affect different sets of taxpayers. Pillar One would apply to multinational enterprises (MNEs) with global turnover above EUR 20 billion and profitability above 10%. That threshold could be reduced to EUR 10 billion upon review seven years after the agreement enters into force. Companies in the regulated financial services industry and the extractive sector will not be subject to Pillar One. The global minimum tax rules under Pillar Two would apply to MNEs that meet the EUR 750 million threshold as determined under the country-by-country reporting rules, with a carve-out for government entities, international organizations, nonprofits, pension funds and investment funds that are ultimate parent entities of an MNE group, which would not be subject to these rules.
As currently proposed, Pillar One is likely to snag only the largest, most profitable global MNEs, whereas many more companies would be in scope for Pillar Two’s minimum tax. The precise thresholds of the final agreement will determine the number of companies that will be affected by each Pillar. However, even if only the largest companies fall within the scope of either Pillar initially, the applicable thresholds may be lowered in the future once the plan is implemented, so that additional companies could potentially be affected.
What Can Taxpayers Do Now?
Although the OECD/Inclusive Framework July 1 statement provides a good deal of information regarding the outlines of the global tax plan, the specifics will not be known until October 2021. Thus, any kind of specific tax planning around the possibility that a company will be subject to the requirements of Pillars One and Two may be premature.
Having said that, taxpayers can prepare for the possibility of fundamental changes by making sure they understand what the proposals involve. MNEs can model the current Pillar One proposal to understand, in general terms, where and what amount of income could be subject to tax in jurisdictions that will have new taxing rights, i.e., where taxes are not currently owed.
Pillar Two is similar to the U.S. GILTI regime, yet it remains to be seen if the U.S. will amend it (beyond the current Biden Administration proposal) to bring it closer in line with the OECD’s final plan. Nonetheless, companies can model the effects of the current OECD proposal (as well as the Biden proposal) to understand their potential effects.