On October 13, 2021 the G20 Finance Ministers endorsed the latest OECD Two Pillar tax package, saying it will “establish a more stable and fairer international tax system”.
But will it? The package now is supported by 147 countries representing over 90% of global GDP.
Will your group’s taxes take off? Or will you outfox the OECD?
The problem:
Until now, tax avoidance was relatively easy – little or no physical presence in the country where customers are, intellectual property and servers in sunny offshore locations.
The digital economy is the target of these proposals. Nonetheless, they catch many businesses that supply goods, services, or digital products over the internet.
What’s ahead?
The proposals run to hundreds of pages and are still evolving. They refer to Pillar 1 and Pillar 2. Pillar 1 calls for tax in the market countries where customers are, Pillar 2 calls for a minimum global corporate tax rate of 15%.
Pillar 1 would require an MNE with global annual revenue above EUR 20 billion to allocate two amounts of profit, A and B, to market jurisdictions.
Amount A would be 25% of profits exceeding 10% of sales, but not to jurisdictions with less than €1 million sales (or €250,000 in smaller jurisdictions with GDP under EUR 40 billion).
Amount B is an easy transfer pricing formula approach for calculating the taxable profit margin on “baseline marketing and distribution activities.” It will apply to businesses of all sizes distributing to participating countries.
Pillar 2 calls for a minimum global tax rate of 15% on groups with annual revenue exceeding EUR 750 million, through a variety of means:
- Top-up tax for the parent company – income inclusion rule (IIR);
- Denial of expense in payor countries if no IIR applies – Undertaxed Payment Rule UTPR);
- Withholding tax of 7.5%-9% (via a tax treaty Subject To Tax Rule STTR).
The starting point will be financial accounts.
Digital Service Taxes (additional sales taxes) enacted in several countries – including the UK, Canada, France, Spain, Italy, Turkey, and India – may continue until Pillar 1 Amounts A & B are agreed at the political level. The USA is pushing for this.
Expected “Carve-Out” exceptions:
Exceptions to Pillar 1:
- Extractives;
- Regulated financial services.
- Etc.
Exceptions to Pillar 2:
- If there is a distribution of earnings within four years and tax exceeds the minimum level.
- The ultimate parent is a governmental entity, international organization, non-profit organization, pension fund, or investment fund.
- “Substance” of 5%-8% of tangible assets and 5%-10% of payroll.
- Jurisdictions with revenues below EUR 10m and profits EUR 1m.
- International shipping.
- Where US GILTI rules apply, apparently.
- MNEs with tangible assets abroad under EUR 50 million operating in no more than five other jurisdictions.
- Various safe harbors for stipulated periods.
- Etc.
Tax impact:
Pillar 1 should apply to about 100 MNEs and result in new annual taxable profits (not tax) of $125 billion. Pillar 2 should bring in big money – around $150 billion per year or more.
Timing:
Many countries are introducing Pillar 2 in 2024-2025. Pillar 1 is in abeyance.
What else?
The OECD has introduced a Multilateral Instrument (MLI) which tightens up the income taxation of groups that use warehouses and/or agents and/or subsidiary companies. The MLI is potentially applicable to groups of any size in over 100 countries. The MLI rules are complex.
VAT, GST (goods & service tax), DST (digital sales tax) and sales tax may now apply to overseas suppliers of almost any size with customers or users in the US, EU, UK, Canada and other countries.
In parallel, many countries and US states are starting to impose tax on online platforms as it is easier to tax them than their clients.
Comments:
All these developments need monitoring and there are many issues of concern, including:
- Taxation without representation? The world public does not get to vote on the OECD recommendations which are generally binding on OECD members (OECD Convention 1960 Art.6).
- Back-door incentives such as R&D tax credits if certain conditions are met.
- Legal issues.
- Customs issues.
- Complexity.
- Multiple taxation – income tax, VAT, sales tax, customs duty, etc.
- Smaller multinational groups and hitech start-ups are not off the hook.
- The transition in the US to the Trump administration.
- Who will regulate the OECD measures – the OECD?
- Currency and language?
- Data security in 147 countries?
- No international tax tribunals. Only more limited and slow treaty consultation rules and dispute resolution rules.
- Segmentation of diverse groups?
- Treatment of venture capital funds.
- Claiming refunds if there is tax overpayment under different rules.
- Generally no credit for foreign VAT/GST/Sales Tax against domestic income tax.
What will all this mean for most groups?
Stormy times are ahead. Free trade is about more than customs duties. We strongly recommend monitoring, modeling and protective action, starting now. We can assist you.
Will there still be legitimate tax planning opportunities?
Yes. And not all the opportunities are intuitive.
Next Steps:
Please contact us if you need to discuss the above or any other business matter.
Always consult experienced professional advisors in each country concerned – we can help arrange this.
© November 15, 2024