BEPS 2.0 – Observation from an energy and chemicals perspective BEPS 2.0 – Observation from an energy and chemicals perspective BEPS 2.0 – Observation from an energy and chemicals perspective

• Energy suppliers are balancing a competing set of demands from customers, regulators, and employees. Technology is helping to revolutionize how businesses can meet their various needs, if organizations can find the capital to make the investment.
• The adoption of wind, solar and other renewables is accelerating as costs fall, reliability increases, and global interest in reducing carbon emissions continues to climb. Capacity is increasing, but demand for further increases persists.

• Rate: The Pillar 2 blueprint did not endorse a minimum tax rate for Pillar 2, but early speculation generally centered around 12.5% as a model for an acceptable minimum. The statement endorsed a minimum rate of at least 15%, and negotiations for a potentially higher rate continue. If the rate were ultimately set at 20%, for example, Pillar 2 could have a significantly different impact on ENRC companies.
• GILTI co-existence: The co-existence of Pillar 2’s GloBE rules is a key issue for US businesses. The statement notes that consideration will be given to how GILTI will co-exist with the GloBE rules, but the technical details of any coordination mechanism have not yet been revealed. For companies in the oil and gas sector, GILTI’s foreign oil and gas extraction income (FOGEI) exception could complicate this interaction. There are various Biden administration proposals that would modify the GILTI regime. If GILTI is amended to apply on a country-by-country basis, this would also affect its co-existence with Pillar 2.
• Carve-outs: The Pillar 2 blueprint and the statement both propose a formulaic carve-out to exclude a fixed return for substantive activities. Payroll and tangible assets are proposed to be indicators of substantive activities. According to the Pillar 2 blueprint, the tangible assets component would include property, plant and equipment (PPE) and natural resources (including oil and gas deposits and mineral deposits) in a jurisdiction. The carve-out for PPE and natural resources would be based on the depreciation of the PPE and the depletion of the relevant natural resources, respectively. Assuming that this remains the case, natural resources companies would clearly benefit from the inclusion of natural resources in the carve-out, while other asset-intensive ENRC businesses such as mining and chemical companies would also benefit from the inclusion of depreciation.
• Financial accounting standards: The use of financial accounting standards as the starting point for calculating the tax base for a jurisdiction could result in the understatement or overstatement of the ETR in jurisdictions where the accounting standards vary from those in the parental jurisdiction. This is especially true for some segments of the ENRC sector where specific accounting policies may apply, such as natural resources (e.g., successful efforts or full cost methodologies or where production sharing contracts apply specific policies).
• Covered taxes: The Pillar 2 blueprint considers that taxes on activities such as the exploration and production of oil and gas (irrespective of whether or not they apply in addition to a generally applicable income tax) would fall within the general definition of a covered tax. Resource levies closely linked to extractions (e.g., imposed on a fixed basis or on the quantity, volume or value of the resources extracted rather than on net income or profits) may not be treated as covered taxes. As such, there is a risk that certain taxes paid by mining and oil and gas companies may not be covered taxes, and thus the risk of additional taxes applying under Pillar 2 is increased.
• Permanent differences: It is proposed that certain adjustments will be made to the tax base for permanent differences, using an agreed set of principles, although the July statement does not contain any detail on what these adjustments would be. Jurisdictions often provide significant incentives to certain businesses in the ENRC sector, including both natural resources and renewable energy companies, that may be treated as permanent differences from an accounting perspective. The failure to take these into account under Pillar 2 may result in the ETR for a jurisdiction being understated and it would be helpful if these incentives could be white listed where they are deemed acceptable regimes.
• Timing differences: Timing differences for businesses operating in the ENRC sector are often substantial, as it is capital intensive. Jurisdictions often offer incentives in the form of immediate expensing of capital expenditure or accelerated depreciation. The Pillar 2 blueprint discusses options for potentially addressing common timing differences (e.g., adjusting for certain deferred tax liabilities) and highlights the need to avoid creating additional complexities. However, it is not currently clear what approach will ultimately be adopted and this will be critical to clarify in order to understand the impact on the ENRC sector.
• Transitional rules and carry-forwards: For many ENRC businesses, volatility in commodity prices can result in significant fluctuations in returns. Natural resources companies are subject to significant upfront exploration and development costs. How losses are carried forward and excess taxes paid in prior years (including prior to the start date of Pillar 2) are recognized will be particularly important for the ENRC sectors, especially in the context of repayments of tax. This may also create additional complexities arising from the need to track carry-forward losses and excess taxes for each jurisdiction.
• Dispute resolution: Although there are a number of Pillar 2 interactions that may result in double taxation, little attention has been paid to the challenges that Pillar 2 controversies are likely to pose. The Pillar 2 blueprint’s suggestion that the existing MAP infrastructure will be able to effectively handle these disputes appears overly optimistic.

As noted above, there are several complexities in applying BEPS 2.0 principles to the ENRC sectors. It is recommended that companies in the sector keep a watchful eye as matters progress in order to understand how the rules will be implemented in practice and the resultant impact on ETRs.

Within the ENRC sectors, companies face a shifting economic, regulatory and competitive landscape and often vary significantly in terms of their business and tax structures. KPMG can help you understand, communicate and evaluate the appropriate actions around BEPS 2.0 that take into consideration the complexities of your industry. KPMG’s BEPS 2.0 Model is built on the KPMG Digital Gateway, a single-platform solution that gives organizations access to the full suite of KPMG Tax and Legal technologies.

By combining KPMG’s technology investments with sector-specific professionals, you can stay ahead of the implications of these initiatives with recommendations specific to your industry. We can help you identify potential impacts and possible responses, develop communications plans and help empower you to support your next steps.