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OECD initiative on international corporate taxation

Pillars One and Two are OECD’s response for a need to address international tax reform for digital economies across the globe.

PillarBuilding on the base erosion and profit shifting (BEPS) initiative that culminated in widescale changes to corporate taxation across the globe, the Organisation for Economic Cooperation and Development’s (OECD) Secretariat continues to pursue broad far-reaching international tax reform.

Earlier in 2019, the OECD’s Secretariat issued a discussion document on the tax challenges of the digital economy with a unified approach (referred to as Pillar One). This document proposed new tax rules to alter the way profits are allocated to a jurisdiction in a multinational business, including those that are highly digital. This includes consideration of a new nexus rule, which could allocate profits to a jurisdiction where a business did not previously have a taxable presence under traditional rules (permanent establishment (PE) or nexus).

The Pillar One proposals were covered by Wendy Nicholls and David Green in the September 2019 issue of TAXline. Further commentary on Pillar One can be found in the output from the January 2020 OECD meeting. This also contains an update on Pillar 2 – broadly consistent with the consultation.

In November 2019, the OECD Secretariat issued its Pillar Two document in which it outlined its proposals to further reform international taxation by tackling base erosion. As discussed below, the proposals are far reaching, and the OECD has received thousands of pages of feedback from various stakeholders during its consultation period, which closed in December 2019.

Pillar Two’s objective is to implement a worldwide minimum corporate tax to ensure that there is a minimum amount of cash tax paid by multinationals (MNEs). The rate of minimum tax has not yet been discussed. The proposal is known as the Global Anti-Base Erosion Proposal, or GloBE.

What makes up the GloBE?

The four components of the GloBE are:

  • an income inclusion rule to tax income of a foreign branch or a controlled foreign corporation (CFC) if that income is taxed below a minimum rate;
  • an undertaxed payment rule to deny deduction or impose a withholding tax on payments to a related party if that payment is taxed at below a minimum rate;
  • a switch-over rule to support the income inclusion rule that would allow for a switch from an exemption to a credit method where income in a PE is taxed locally at a rate that is below a minimum rate. This rule could also apply to immoveable property that is not part of a PE; and
  • a subject to tax rule to support the undertaxed payment rule by making payments that are taxed at a rate below the minimum rate subject to withholding tax and/or denying treaty benefits to such payments.

There is significant overlap between the four components of GloBE and it is far from clear how they will interact between themselves or whether countries will be provided a choice as to which means may be used to achieve the Pillar Two objective of a minimum effective tax rate.

The income inclusion rule creates a number of questions, including the level on which it would be applied (parent company jurisdiction, bottom-up or other?) and the in-scope entities.

Some particular challenges addressed by the consultation document include the tax base for the calculation, the ability to blend income streams in the calculation, and specific carve outs.

Tax base and consolidated financial statements

The GloBE consultation document suggests that consolidated financial statements could be used to determine the appropriate tax base for any income inclusion. This suggestion is driven by the complexity of using a parent company’s tax rules in relation to a CFC, which would require recalculation of profits under different tax principles.

Use of consolidated financial statements does however pose its own challenges, including:

  • which Generally Accepted Accounting Principles (GAAP) should be used (eg, US, Japanese, International Financial Reporting Standards or local GAAP)?;
  • the impact of accounting permanent and temporary differences;
  • the appropriateness of changes to tax base brought about by a change to accounting principles;
  • the ability to audit consolidated financial statements by local taxation authorities; and
  • the ability to develop a uniform tax base.

The question also arises as to whether such reliance on accounting principles is appropriate, given ambiguity regarding treatment in some areas, and whether this would provide undue influence on accounting positions taken.

Blending taxes

The consultation document discusses the manner in which foreign taxes could be compared to a minimum effective rate. Of course, the ability to blend high-tax and low-tax income from different sources or jurisdictions would simplify the approach to GloBE but also reduce its impact. The programme of work calls for further discussion on how blending of income streams and entities could be approached, to find common ground between complexity and impact.


At this time, the Secretariat has not indicated specific carve-outs but notes this for debate, for example:

  • a carve-out for SMEs;
  • a carve-out for small quantum of related-party transactions;
  • a carve-out for low-tax regimes which are compliant with BEPS Action 5 standards;
  • carve-outs for specific industries or sectors;
  • a carve-out for a specified rate of return on tangible assets.

While carve-outs can provide certainty and simplicity for some, they can be complex to administer. Carve-outs based on quantitative factors can create volatility for taxpayers operating close to such thresholds.

Interaction of Pillar One and Two

The interaction of the Pillar One and Pillar Two proposals is yet to be seen. Presumably, Pillar One’s impact would be applied to an MNE prior to applying Pillar Two. Further, it would seem logical that any taxes paid as a result of Pillar One would be counted towards the minimum taxes paid on income that are in the scope of Pillar Two. However, the interaction and interdependency of the two pillars needs clarification.
Lastly, the interaction with a particular jurisdiction’s existing CFC rules needs to be considered as otherwise, double or triple taxation could arise.

Scope and development

The OECD’s commitment to addressing the tax challenges of the modern world is clear and we will likely see further developments soon. The potential scope of these rules is vast, and it is therefore important that the debate is followed closely and that a proactive approach is adopted.
The OECD’s proposals are by no means a finished product, but the direction of travel is clear. MNEs and tax practitioners should be considering the potential impact of these proposals as they develop.

Is it too soon for GloBE?

As noted at the outset of this article, BEPS has introduced significant changes to tax systems within the OECD. As a result, substantive measures to protect countries’ tax base have recently been introduced in various countries including the following:

  • interest deductibility rules (typically based on a percentage of earnings before interest, taxes, depreciation and amortisation (EBITDA));
  • CFC legislation which should, if properly implemented, contribute to achieving a minimum taxation rate;
  • anti-hybrid legislation which eliminates tax arbitrage obtained from exploiting different tax characterisation by countries;
  • tightening of rules to limit when tax benefits can be obtained for intellectual property;
  • introduction of a principal purpose test in tax treaties which will greatly limit the ability to obtain lower withholding rates in the source jurisdiction if taxpayers do not have substantive economic presence in the country of residence, via the multilateral instrument (MLI);
  • modifications to transfer pricing guidelines (BEPS action items 8-10); and
  • treaty provisions regarding PE status (BEPS action 7).

Much of the above is relatively recent news, and the impact of BEPS will continue to be noted in the years to come. It could certainly be argued that monitoring the effectiveness and efficiency of these recently introduced changes is sufficient for 2020. Should the enacted measures outlined above not achieve the policy objectives of protecting national tax bases when monitored over time, that could be a more appropriate timetable to consider something as bold as the GloBE measure.

About the author

Matt Stringer, Head of International Tax, Grant Thornton UK LLP