But the OECD proposals could lead to major changes in tax rules, the implications of which businesses must study closely
In October 2020, the OECD released a series of major documents in connection with the ongoing G20/OECD project titled ‘Addressing the Tax Challenges of the Digitalisation of the Economy’. These documents included the report on the Pillar Two Blueprint, which addressed the development of global minimum tax rules with the objective of ensuring that global business income is subject to at least an agreed minimum rate of tax.
The Blueprint on Pillar Two lays down the features of a systemic solution — known as the global anti-base erosion (GloBE) proposal — to address remaining Base Erosion and Profit Shifting (BEPS) challenges. Simply stated, it seeks to ensure that all large and internationally operating businesses pay at least a minimum level of tax, regardless of where they operate.
While the Blueprint includes the design of four rules to achieve this objective, the Income Inclusion Rule (IIR) constitutes the most important feature of the GloBE proposal. The IIR triggers the inclusion of low taxed income at the level of the shareholder where the income of a controlled foreign entity/permanent establishment is taxed at below the minimum tax rate.
According to the OECD, agreement on Pillar Two could increase global corporate income-tax revenues by $60-100 billion per year, or up to around 4 per cent of global corporate income-tax revenues. The specific parameters with respect to the global minimum tax rate was a matter that is the subject of intensive negotiations in the Inclusive Framework and accordingly was not reflected in the Blueprint. However, for the purpose of the economic impact assessment the OECD had assumed a minimum tax rate of 12.5 per cent.
The communiqué issued on June 5 at the close of the G-7 Finance Ministers’ meeting, which included a statement on the global tax proposals, is therefore significant. The communiqué as well as the individual statements made by some of the Finance Ministers indicate not just a strong support to the global tax changes, but an unprecedented commitment for a momentum for achieving a global minimum tax rate of at least 15 per cent.
The confirmation of G7 support for the project is an important step in advancing the work on the proposals for fundamental changes to global tax rules. However, agreement on the proposals requires consensus among the 139 jurisdictions that are members of the Inclusive Framework. Efforts will now be focussed on trying to achieve that consensus in July when the G-20 Finance Ministers meet next.
Effective tax rate
It should however be noted that under the GloBE proposals, the minimum tax rate refers to an effective tax rate (ETR), not the nominal tax rate. ETR is determined by applying the tax base and covered taxes on a country-by-country basis.
Hence, even if a consensus emerges on 15 per cent as the minimum tax rate, it does not mean that jurisdictions that have a nominal tax rate of 15 per cent or higher would not be impacted.
Jurisdictions could have various features in their tax system which can drive the ETR lower than the nominal tax rate.
Hence, multi-national enterprise (MNE) groups will need to review ETR of their subsidiaries on a country-by-country basis to determine if they could be impacted by the GloBE proposals.
It is also important to note that all businesses will not be within scope of the Pillar Two proposals. The current proposal as per the Blueprint is that the GloBE rules would apply only to international groups with a consolidated global revenue in excess of €750 million. Hence, to the extent an MNE group does not breach this threshold, it would be outside the ambit of the GloBE proposals.
The proposals under Pillar Two represent a substantial change to the tax architecture and go well beyond digital businesses or digital business models.
These proposals could lead to significant changes to the overall international tax rules under which businesses operate. It is important for businesses to follow these developments closely in the coming months and to consider engaging with the OECD and policymakers at both national and multilateral levels on the business implications of these proposals.
Businesses also should evaluate the potential impact of these changes on their business models. If no agreement can be reached by the Inclusive Framework, it is expected that there will be more activity in individual countries on putting in place their own minimum tax rules (for example, President Biden’s ‘Made in America’ tax plan proposes a minimum tax rate of 21 per cent).
The design work done on the Pillar Two likely would be a starting point for these unilateral actions, with deviations reflecting the particular country’s own interests. While a consensus based multilateral solution could lead to a more favourable environment for investment and growth, unilateral measures may further jeopardise the integrity of the international tax system.
The writer is Partner, International Tax Services, EY India. Views are personal