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.
EU tax developments
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.