Cracks in the Pillars?

The OECD expects delays in introducing BEPS 2.0.

The OECD expects delays in introducing BEPS 2.0.

Over the past week several media outlets have reported comments made by OECD Secretary-General Mathias Cormann at the World Economic Forum at Davos in Switzerland to the effect that the long awaited BEPS 2.0 deal is now not expected to come into force in 2023 as originally anticipated. The OECD/G20 reform of the international taxation system, known as BEPS 2.0, is groundbreaking. The existing rules have stood, at least in their basic principles, for over a century and updating them for modern international commerce has been a major undertaking. The introduction of the new system will mean fundamental changes to the way multinational groups are taxed. But such historic change is not easy to implement. Great progress has already been made but now the project is running up against the many practical complexities of implementation.

BEPS 2.0 is a new approach to international taxation designed to reflect modern cross-border trade and commerce, facilitated by but not limited to digital business.

Two ‘Pillars’ have been developed: Pillar One being the reallocation to market jurisdictions of taxing rights over a portion of the largest and most profitable multinationals’ profits; while Pillar Two would introduce a minimum effective tax rate of 15 percent in each jurisdiction in which many groups operate.

As an agreement between countries, Pillar One is to be given effect by a multilateral treaty. Pillar Two, though also partly requiring treaty changes, mostly requires new domestic law in each adopting jurisdiction (based on a common model). Both Pillars were intended to take effect from 2023.

The practical challenges facing the two different routes are different, but substantial. There are multiple media reports stating the rules will be delayed until 2024 in many jurisdictions, based on the comments made by OECD Secretary-General Mathias Cormann at Davos.

For Pillar One, the OECD is currently progressing through a set of ‘building block’ consultations to pin down the details of the treaty. Extending national taxing rights to countries in which the taxpayer may have no physical presence is a major shift. Securing countries’ agreement to this in principle was a lengthy process. The treaty text was intended to be finalised around the middle of this year but these recent comments now suggest that 2024 is a more likely target. We also shouldn’t forget that ‘Amount B’ of Pillar One, the standardised return for ‘baseline’ marketing and distribution activities, will require yet another multinational negotiation.

Pillar Two is closer to completion than Pillar One. Following extensive negotiations, the OECD published a set of model rules for the main aspects of Pillar Two in December 2021, supplemented by commentary earlier this year. These have been broadly accepted and steps have been taken towards domestic implementation by many countries. Along with the UK, other countries (Japan, Canada and Australia, to name a few) appear to be heading for a 2023 implementation. However, some intend, or will be unable to avoid, deferral until 2024. In the US, tax reform to align with Pillar Two has the backing of the Administration and has passed the House of Representatives, but not yet the Senate. In the EU, the French Presidency has proposed a compromise text which would effectively see Pillar Two taking effect from 2024, but Poland is yet to agree. The faster-moving countries may decide to push on regardless and companies should continue to plan for a 2023 introduction in at least some of their main jurisdictions.

As many anticipated, much work remains to complete the construction. The snagging works might run a little longer yet.