{"id":10255,"date":"2020-02-06T15:00:00","date_gmt":"2020-02-06T14:00:00","guid":{"rendered":"https:\/\/auren.com\/il\/global-blog\/taxation-on-digital-economy-pillar-two-2\/"},"modified":"2025-04-10T09:20:26","modified_gmt":"2025-04-10T07:20:26","slug":"taxation-on-digital-economy-pillar-two-2","status":"publish","type":"global-blog","link":"https:\/\/auren.com\/il\/he\/global-blog\/taxation-on-digital-economy-pillar-two-2\/","title":{"rendered":"Taxation on digital economy (Pillar two)"},"content":{"rendered":"

BACKGROUND<\/strong><\/strong><\/p>\n

On October 9th, 2019 the Secretariat released a public consultation of the proposed \u201cUnified Approach\u201d under Pillar One. Following this release, the Secretariat issued another public consultation document focused on comments on the Pillar Two of the Programme of Work2. That document focuses specifically on the technical issues of the GLoBE proposal, primarily on three technical aspects of it:<\/p>\n

    \n
  1. The use of financial accounts
    \nto determine the tax base<\/li>\n
  2. The extent of blending low and
    \nhigh-tax income<\/li>\n
  3. Views on carve-outs and thresholds
    \nconsidered for the GLoBE proposal<\/li>\n<\/ol>\n

    For purposes of this summary, first a review of Pillar Two is be
    \nprovided.<\/p>\n

    Pillar Two, also referred to as the GLoBE proposal,
    \nseeks to develop a co-ordinated set of rules to address ongoing concerns
    \narising from multinational structures that allow profit shifting to
    \njurisdictions where income is not taxed or is taxed at a very low level.<\/p>\n

    The proposed set of rules are intended
    \nto modify at a certain
    \nlevel domestic laws and
    \ntax treaties, with the objective of implementing a minimum rate of tax on all income and therefore deterring MNE\u2019s from
    \nengaging in profit shifting. The components of the GLoBE proposal are:<\/p>\n

      \n
    1. The Income Inclusion Rule: operates as a minimum tax rate MNE\u2019s on
      \ntheir global income. The aim is to establish a floor for tax rates without
      \nregards of where the MNE is headquartered. In other words, this rule acts as a
      \ntop up on that income which was taxed at a rate
      \nbelow the minimum rate established.<\/li>\n<\/ol>\n

      1 Public
      \nConsultation Document, Addressing the Tax
      \nChallenges of the Digitalization of the Economy, <\/em>13 February \u2013 6 March
      \n2019.<\/p>\n

      2 Public
      \nConsultation Document, Global Anti-Base
      \nErosion Proposal GLoBE, <\/em>8 Novemeber 2019 \u2013 2 December 2019.<\/p>\n

        \n
      • Undertaxed Payment Rule: this rule would deny a deduction or imposed
        \na source-based taxation on payments made to related
        \nparties if such payments
        \nare not subject to a tax at the minimum rate
        \nestablished.<\/li>\n<\/ul>\n
          \n
        • Switch-Over Rule: this rule would be introduced into tax treaties
          \nand would allow resident jurisdictions to impose a credit method on profits
          \nattributable to PE\u2019s or other types of profits that are subject to a tax rate
          \nbelow the minimum rate established.<\/li>\n<\/ul>\n
            \n
          • Subject to Tax Rule: this rule would act as a complement to the
            \nundertaxed payment rule and would modify certain tax treaty\u2019s articles to limit
            \ntheir benefits on certain
            \nitems of income,
            \nprimarily focused on interest and royalty
            \npayments.<\/li>\n<\/ul>\n

            As a whole, the GLoBE proposal suggests that with the
            \nabsence of low taxing rates and the standardization of a minimum rate, the
            \nplaying field is leveled for both, taxpayers and tax jurisdictions.<\/p>\n

            CONSIDERATIONS FOR PILLAR TWO<\/h4>\n

            However, just like for Pillar One, the Secretariat calls
            \nfor comments and suggestions from the public
            \non several design issues that need to be dealt with in order to achieve
            \na coordinated effort that is based on simplicity, minimum
            \nadministrative burden, and eliminates the risk of double taxation.<\/p>\n

            There are several technical and design aspects of the
            \nGLoBE that depend on policy choices and these include:<\/p>\n

              \n
            1. Determination of the tax base<\/li>\n
            2. Blending<\/li>\n
            3. Carve-Outs<\/li>\n<\/ol>\n

              Determination of the Tax Base<\/h4>\n

              The PoW starts from the idea that the tax base should be determined according to the CFC rules that jurisdictions already apply or Corporate Income Tax rules of the shareholder\u2019s residence jurisdiction. <\/p>\n

              However, this would imply that all subsidiaries of an MNE would have to recalculate their income using the rules of the parent jurisdiction, causing not only significant administrative costs but also leading to potential risks that a highly taxed subsidiary is treated as a low taxed entity.<\/p>\n

              In order to avoid such complications, the PoW explores
              \nsimplifications like setting financial accounting rules subject to certain
              \nspecified adjustments when calculating the tax base. This would eliminate the
              \nrisk of mis-calculating the tax base and therefore mis-calculating the rate at
              \nwhich that income was taxed merely because different accounting standards are
              \nemployed.<\/p>\n

              Once the tax base is determined, that tax base would have to be analyzed in order to determine if it was taxed above the
              \nminimum tax rate (according to the income inclusion rule)3. Once again, a consensus must be reached to determine whether to
              \nuse a fix rate or a minimum tax based on a percentage of the jurisdiction CIT rate.<\/p>\n

              Blending<\/h4>\n

              Blending is the mixing of income that is taxed at high
              \nand low rates within the same entity.<\/p>\n

              Because the GLoBE proposal is surrounded by the idea of
              \na minimum tax rate, determining how to calculate such rate is crucial. The PoW,
              \nunder the public consultation, seeks to gather opinions
              \non the best way to calculate the minimum rate, including the level of blending
              \nincome that MNE should be allowed to
              \nuse. This public consultation names
              \nthree types of blending, each with its own pros and cons. The three types of
              \nblending are:<\/p>\n

                \n
              1. Worldwide blending: this type
                \nof approach would require MNE\u2019s to aggregate its total foreign income and the
                \ntax on such income and compare the rate paid to the minimum rate established.<\/li>\n<\/ol>\n

                3 Consideration is
                \nplaced in terms of replacing CFC rules with the Income Inclusion Rule.<\/p>\n

                The difference
                \nbetween the tax effectively paid and the minimum rate would<\/p>\n

                the MNE\u2019s tax
                \nliability under the GLoBE proposal.<\/p>\n

                  \n
                • Jurisdictional blending: the
                  \napproach would require MNE\u2019s to distinguish income between the different jurisdictions where they have presence or where they are
                  \ntaxed. If in a certain jurisdiction
                  \nthe total amount of income attributable to such jurisdiction is taxed below the
                  \nminimum rate, then the MNE\u2019s liability would be that amount necessary to bring
                  \nthe total amount of tax up to the minimum rate.<\/li>\n<\/ul>\n
                    \n
                  • Entity blending: such approach
                    \nwould require each entity within an MNE to determine its income and tax. If the
                    \neffective tax rate of a foreign branch or foreign entity was below the
                    \nestablished minimum rate, then the MNE would be subject to tax.<\/li>\n<\/ul>\n

                    Each approach represents a unique policy and while some
                    \nare more specific than others, they also represent more challenging and
                    \nburdensome approaches. Choosing the
                    \nappropriate blending will also require to consider the challenges that arise
                    \nfrom other design aspects, like determining the proper tax base. Issues like
                    \nthe use of financial accounting principles or the effects of timing issues can
                    \nhave effects on the calculation of the effective tax rate in any of the three approaches.<\/p>\n

                    Carve-Outs<\/h4>\n

                    The PoW also considers the possible application of
                    \ncarve-outs and thresholds to restrict the application of the GLoBE proposal to only scenarios where it is deemed to be best applicable.<\/p>\n

                    As a start, the
                    \nmentioned carve-outs include:<\/p>\n

                      \n
                    1. Regimes complaint with BEPS Action 5.<\/li>\n<\/ol>\n
                        \n
                      • Return on tangible assets<\/li>\n<\/ul>\n
                          \n
                        • Controlled corporations with a level of related
                          \npart transactions below a specific threshold.<\/li>\n<\/ul>\n

                          The public discussion also addresses the exploration of
                          \nthresholds for the application of
                          \nthe GLoBE proposal:<\/p>\n

                            \n
                          1. A threshold based on turnover
                            \nor other financial indicator of the size of the group<\/li>\n<\/ol>\n
                              \n
                            • A threshold to exclude entities
                              \nwith a minimum amount of profit or intercompany transactions.<\/li>\n<\/ul>\n
                                \n
                              • Specific industry or sector carve-outs.<\/li>\n<\/ul>\n

                                It is emphasized that carve-outs and thresholds would
                                \nundermine the policy intent and impact compliance and administration costs. The
                                \ndesign or implementation of carve-outs and thresholds can be circumstance-based
                                \nor objective (based of certain measurable criteria).<\/p>\n

                                Conclusions<\/h4>\n

                                As part of the BEPS project, both Pillar One and Pillar Two seek to close gaps in the international tax spectrum. However, despite the consensus reached and the work done by members of the Inclusive Framework, there are still several topics that need to be discussed and polish further. <\/p>\n

                                From the allocation of taxing rights to the development of a co-ordinated strategy to regulate and tax international profits, these challenges and issues make the path to reach a consensus agreement a challenging one. It is important to remember that a solution much be reached by the end of 2020. As such, it is expected that numerous more documents will come to light in the near future, as the stakeholder in the matter, including G20 Finance Ministe, world leaders and the OCDE work jointly to develop a solution that tackles effectively the challenges arising from the Digitalization of the Economy and the Erosion of Profits<\/p>\n

                                Jose Miguel Rodriguez, Auren Mexico.<\/p>\n<\/p>\n

                                <\/p>\n","protected":false},"excerpt":{"rendered":"

                                On October 9th, 2019 the Secretariat released a public consultation of the proposed \u201cUnified Approach\u201d under Pillar One. Following this release, the Secretariat issued another public consultation document focused on comments on the Pillar Two of the Programme of Work2. That document focuses specifically on the technical issues of the GLoBE proposal<\/p>\n","protected":false},"featured_media":8327,"template":"","meta":{"_acf_changed":false},"global-blog-category":[],"class_list":["post-10255","global-blog","type-global-blog","status-publish","has-post-thumbnail","hentry"],"acf":[],"yoast_head":"\nTaxation on digital economy (Pillar two) - Auren Israel<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/auren.com\/il\/he\/global-blog\/taxation-on-digital-economy-pillar-two-2\/\" \/>\n<meta property=\"og:locale\" content=\"he_IL\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Taxation on digital economy (Pillar two) - Auren Israel\" \/>\n<meta property=\"og:description\" content=\"On October 9th, 2019 the Secretariat released a public consultation of the proposed \u201cUnified Approach\u201d under Pillar One. 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