Guiding us to the Pillar: the OECD’s Detailed Commentary on Pillar Two
Updating the international taxation system is no easy task. The OECD has provided detailed guidance, but is it enough to meet the challenging deadline
Updating the international taxation system is no easy task.
On Monday 14 March 2022 the Organisation for Economic Cooperation and Development (OECD) published its much-anticipated commentary on the Pillar Two model rules together with a further document setting out illustrative examples. The model rules define the scope and set out the operative provisions and definitions of the ‘global anti-base erosion’ (GloBE) rules under Pillar Two. This is the set of rules subjecting large corporate groups to an effective minimum global tax rate of 15 percent. Following a lengthy period of negotiation, the model rules were published in December last year. Since then, companies, tax professionals and tax authorities have been working to understand how they will apply. Time is short: the intended commencement date for the main ‘Income Inclusion Rule’ (IIR) is 1 January 2023. It is hoped that the Commentary will resolve some of the questions arising from the model rules, but the timeline to implementation remains challenging.
The 15 percent minimum tax will apply to multinational enterprises (MNEs) with consolidated revenues greater than €750 million and is expected to generate around US$150 billion in additional global tax revenues annually. The OECD has stated that the Commentary provides MNEs and tax administrations with detailed guidance on the intended application of the GloBE rules to specific fact patterns and clarifies the meaning of certain terms. This should help promote a consistent and common interpretation of the GloBE rules worldwide.
The Commentary has been eagerly awaited: countries (including the UK) have launched consultations on implementing the rules in their respective jurisdictions and it is hoped that the document will resolve some uncertainties identified in the model rules.
At almost 250 pages the Commentary will take some time to work through. Specific areas covered include:
- Treatment of acquisitions and disposals of group members;
- Rules to deal with particular holding structures and tax neutrality regimes;
- Administrative aspects, including information filing requirements; and
- Transitional rules for MNEs that become subject to the global minimum tax.
The illustrative examples are in a separate document and specifically do not form part of the Commentary.
Although the guidance is welcome, there is some doubt as to whether the general Pillar Two timetable, in particular the assumption that the IIR will be implemented by 1 January 2023, is achievable in practice. The EU already appears to be preparing for a twelve month delay with an effective start date of 1 January 2024. In addition, the EU may seek to make the IIR optional for five years for any Member State which has no more than ten headquartered groups that would be subject to the rules.
The timetable was always going to be challenging and some EU Member States have previously indicated that 1 January 2023 would be difficult to achieve. Looking more widely, the US Build Back Better Act (including provisions to align the US global intangible low-taxed income regime with Pillar Two) has run into difficulties and it remains unclear how other jurisdictions would deal with a US implementation delay. This may potentially raise the question of whether the UK will continue with its original timetable for implementation in 2023, although 2023 implementation remains the UK Government’s stated position. Groups remain advised to plan and prepare for implementation in the UK on this timeline. The OECD also has yet to provide the details of the ‘subject to tax rule’ (STTR) that is part of the agreement under Pillar Two and a key priority for developing nations.
The OECD has also invited comments (by 11 April 2022) on the implementation framework set out in the October Inclusive Framework statement. The aim is to provide tax authorities with a consistent package of guidance on the administration of the rules.
You can find more information in these two reports: Inclusive Framework BEPS Agreement - Update on Pillar 2 following Commentary Release and Top 20 questions and answers on new GloBE Model Rules Commentary.