On October 9th, 2019 the Secretariat released a public consultation of the proposed “Unified Approach” 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:
For purposes of this summary, first a review of Pillar Two is be
Pillar Two, also referred to as the GLoBE proposal,
seeks to develop a co-ordinated set of rules to address ongoing concerns
arising from multinational structures that allow profit shifting to
jurisdictions where income is not taxed or is taxed at a very low level.
The proposed set of rules are intended
to modify at a certain
level domestic laws and
tax treaties, with the objective of implementing a minimum rate of tax on all income and therefore deterring MNE’s from
engaging in profit shifting. The components of the GLoBE proposal are:
Consultation Document, Addressing the Tax
Challenges of the Digitalization of the Economy, 13 February – 6 March
Consultation Document, Global Anti-Base
Erosion Proposal GLoBE, 8 Novemeber 2019 – 2 December 2019.
As a whole, the GLoBE proposal suggests that with the
absence of low taxing rates and the standardization of a minimum rate, the
playing field is leveled for both, taxpayers and tax jurisdictions.
However, just like for Pillar One, the Secretariat calls
for comments and suggestions from the public
on several design issues that need to be dealt with in order to achieve
a coordinated effort that is based on simplicity, minimum
administrative burden, and eliminates the risk of double taxation.
There are several technical and design aspects of the
GLoBE that depend on policy choices and these include:
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’s residence jurisdiction.
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.
In order to avoid such complications, the PoW explores
simplifications like setting financial accounting rules subject to certain
specified adjustments when calculating the tax base. This would eliminate the
risk of mis-calculating the tax base and therefore mis-calculating the rate at
which that income was taxed merely because different accounting standards are
Once the tax base is determined, that tax base would have to be analyzed in order to determine if it was taxed above the
minimum tax rate (according to the income inclusion rule)3. Once again, a consensus must be reached to determine whether to
use a fix rate or a minimum tax based on a percentage of the jurisdiction CIT rate.
Blending is the mixing of income that is taxed at high
and low rates within the same entity.
Because the GLoBE proposal is surrounded by the idea of
a minimum tax rate, determining how to calculate such rate is crucial. The PoW,
under the public consultation, seeks to gather opinions
on the best way to calculate the minimum rate, including the level of blending
income that MNE should be allowed to
use. This public consultation names
three types of blending, each with its own pros and cons. The three types of
3 Consideration is
placed in terms of replacing CFC rules with the Income Inclusion Rule.
between the tax effectively paid and the minimum rate would
the MNE’s tax
liability under the GLoBE proposal.
Each approach represents a unique policy and while some
are more specific than others, they also represent more challenging and
burdensome approaches. Choosing the
appropriate blending will also require to consider the challenges that arise
from other design aspects, like determining the proper tax base. Issues like
the use of financial accounting principles or the effects of timing issues can
have effects on the calculation of the effective tax rate in any of the three approaches.
The PoW also considers the possible application of
carve-outs and thresholds to restrict the application of the GLoBE proposal to only scenarios where it is deemed to be best applicable.
As a start, the
mentioned carve-outs include:
The public discussion also addresses the exploration of
thresholds for the application of
the GLoBE proposal:
It is emphasized that carve-outs and thresholds would
undermine the policy intent and impact compliance and administration costs. The
design or implementation of carve-outs and thresholds can be circumstance-based
or objective (based of certain measurable criteria).
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.
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
Jose Miguel Rodriguez, Auren Mexico.