Are you ready for global tax reform? Are you ready for global tax reform?

Heads of tax are facing enormous complexity and uncertainty in today’s fast-evolving global tax environment.

The tax landscape is being transformed by three landmark international developments, which are clearly now taking shape. These are the OECD’s BEPS 2.0 rules, new EU business taxation proposals and further US tax reform.

The OECD’s Base Erosion and Profit Shifting (BEPS) initiative began as an effort to properly tax digital enterprises. But, over time, it has evolved to a point where almost any corporate group above a certain size is in scope.

Under the latest version of the implementation framework, elements of the two-pillar BEPS 2.0 plan are due to take force in 2023. 

Work on the detail of Pillar One is ongoing, with key announcements due this year. Pillar One impacts groups with over €20 billion in revenue, and has two parts:

• Amount A is a new taxing right, which allocates 25 percent of profits above 10 percent of a firm’s revenue by market jurisdiction – using a specific formula, rather than the usual arms-length principle (ALP).
• Amount B is a work in progress, but aims to move beyond ALP-based allocation of taxable remuneration for routine distribution and marketing activities.

The rules on sourcing, and the revenue-based allocation key, are yet to be set in stone. But for Pillar One to work, these will need to allow a degree of flexibility.

There is work to be done on Pillar One during 2022 – not least to ensure a critical mass of jurisdictions are on track for implementation next year.

Pillar Two will usher in unprecedented Global Minimum Taxation (GLoBE) rules, including a minimum 15 percent tax rate on multinationals with over €750m global revenues.

That sounds simple – albeit radical. But OECD policymakers have tried to retain some substance-based reliefs, and a degree of flexibility for countries when collecting the minimum tax.

The final Pillar Two rules brought in the new concept of a domestic top-up tax, which many countries (including the UK) are considering adopting. This allows jurisdictions to introduce rules that effectively duplicate the GloBE rules for top-up tax; but ensures that this is collected by that local jurisdiction, rather than ceded to another country under the GLoBE rules.

If low-tax jurisdictions take this path, this may reduce the complexity of the rules in many circumstances – while achieving Pillar Two’s aim to establish a floor for tax competition.

The GloBE rules could have a significant impact on the effective tax rate (ETR) that multinational groups pay. And they’re likely to create numerous implementation challenges, along with an increased administrative burden.

Along with the proposed UK adoption in 2023, an EU Directive seeks agreement on implementation among Member States by Spring 2022, with the GLoBE rules taking effect in Europe from 2023. But questions remain on this timeline, and are likely to intensify if progress stalls in the US. Some Member States have cautioned against rushing implementation without parallel agreement in the US and elsewhere. 

In 2021, the EU released a Communication on Business Taxation for the 21st Century, which contained a range of proposed actions due into effect between now and 2023.

These include rules aimed at increasing corporate transparency, and combatting low-substance tax arrangements:

• public, country-by-country reporting for multinational groups with total consolidated revenues of at least €750 million, which are EU-parented or have EU subsidiaries or branches of a certain size.
• new rules aimed at neutralising the misuse of shell entities within EU Member States (known as ATAD 3).

At the same time, the EU has other key proposals on its agenda, including:

• mandatory publication of ETRs by jurisdiction, for companies with an EU presence and within the scope of Pillar Two
• recommendations on the domestic treatment of losses
• the creation of a new Debt Equity Bias Reduction Allowance (DEBRA)
• the introduction of the Business in Europe: Framework for Income Taxation (BEFIT) – a common tax rulebook – and a new allocation of taxing rights between Member States.
  

The US Build Back Better Act (BBBA) contains an ambitious spending programme (including on infrastructure and clean energy), and measures to generate the revenue to pay for it.

The legislative progress of the Act has been hit by significant uncertainty, and stalled in late 2021. Whether it can be passed, and if so, which elements will survive, remains to be seen.

The BBBA proposes a 15 percent minimum tax on adjusted financial-statement income, for corporations with a three-year average global income of over $1 billion.

And it touches on other key aspects of the country’s corporate tax system, including the Base Erosion and Anti Abuse Tax (BEAT) and Global Intangible Low-Taxed Income (GILTI) regimes. 

The BBBA proposes changes to the country’s BEAT framework, including:

• a gradual increase in the tax rate on in-scope payments, from 10 percent currently to 18 percent by 2025
• the expansion of the BEAT payments base – for example, to include the cost of goods sold
• the exclusion of payments that are subject to a minimum ETR under a foreign tax regime, of at least the BEAT rate or 15 percent (whichever is lower).

The BBBA also envisages some significant changes to the GILTI regulations – some of which are to ensure that the regime can comply with the Pillar Two GLoBE rules. The proposals include:

• a GILTI tax-rate increase – from 10.5 percent to 15 percent
• a reduction in the exemption for tangible property – from 10 percent to 5 percent
• a country-by-country limitation, by which losses generated in one country can no longer offset income generated in another
• the introduction of per-country loss carry-forward, which replaces aggregated calculations.

The Act goes further still, detailing changes to the rules on interest-expense deductibility, foreign-derived intangible income (FDII), dividends-received deductions and more.

To date, none of the proposed US tax reforms contain proposals in connection with Pillar One of BEPS 2.0 – probably because many key aspects of Pillar One are yet to be agreed. Treasury Secretary Janet Yellen has signalled that implementation will be addressed in 2022 – though the legislative process of adopting Pillar One remains challenging.

Taken together, these reforms represent a seismic shift in international taxation. But amid so much uncertainty, one thing is clear: we’re heading for a more complex international tax system, and a period of higher corporate tax.

Governments worldwide need to plug budget deficits stemming from the pandemic, while supporting economic growth, protecting key industries and attracting inward investment. Meanwhile, they’re linking the international tax system with sustainable development and decarbonisation. Multinationals will be expected to play a part.

In this context, businesses are desperate for some certainty over the new rules and their global implementation; and for a settled period without radical change.

That will allow tax departments to bring their compliance systems and processes in line with a transformed fiscal landscape, and factor more stable assessments of future tax costs into their investment plans. 

In the meantime, companies will need to communicate the turbulence they’re dealing with to their stakeholders. The message should be that there is huge change and complexity in the offing, and we simply don’t know how it will all play out.

What’s certain, however, is that it will prove disruptive in the short term. There may be unintended consequences of the new regimes: groups might have to unwind structures that fall foul of them.

Strategically, managing relationships with tax authorities will be even more important; especially given the interaction of businesses’ global tax positions, and the wealth of data they’ll need to provide. Multinational groups must ensure the support of their lead tax authority, to help them reach agreement with other countries’ tax authorities.

Businesses must have ready access to the detail of their global tax positions. They’ll need to understand the interaction of these positions under the new rules, across the countries in which they operate and are organised.

For tax departments, the quantities of data – historical and current – to be captured, mapped, stored, analysed and reported will increase exponentially. Making that information readily available must be a priority, so that tax functions have an in-depth understanding of the business and its current and future tax position.  

All of which will require new competencies in tax departments.

Data sourcing, data management, modelling, scenario planning, stress testing and technical accounting skills will be vital, for two reasons. To understand and plan for the impact of a changed international tax environment; and to comply with reforms once they’re implemented. Meanwhile, automation capabilities will enable sleek calculation, solution architecture and compliance processes.

Ultimately, the onus will be on tax functions to be accountable for their data management to be as efficient as possible, so they can stay focused on value-generating activity.