In 2013, members of the OECD/G20 began to review the digital economy as part of the Base Erosion and Profit Shifting ("BEPS") Action Plan. Their primary aim was to allow the fair taxation of profits generated by businesses without a physical presence in the relevant market jurisdictions by introducing new nexus and profit allocation rules.
Since then, the digital economy has continued to evolve at a breakneck pace, with industry-agnostic functions from digital platforms to data analytics shifting value creation across international borders. This trend shows no signs of abating and is only accelerated by the latest Covid crisis, having expanded a presence into almost every industry which makes it increasingly challenging to ring-fence.
Following an interim report, on 29 January 2019, the OECD published a policy note on new proposals to combat the BEPS activities of multinational companies, which was referred to as „BEPS 2.0". One and a half years later, on 12 October 2020, after a series of policy notes and public consultations, the OECD published blueprints for Pillar One and Pillar Two, together with accompanying documentation including an economic impact assessment.
Pillar One aims at developing an approach for establishing taxable presence ("nexus") in the digitalised and consumer-facing economy. Pillar Two introduces the concept of a global minimum profit tax.
The updated blueprints provide detail on the technical design and features of each pillar, identify areas that require further technical work prior to finalization, and also highlight aspects where political agreement will be necessary. As the OECD documents make clear, the Blueprints do not reflect agreement by the member jurisdictions of the Inclusive Framework on BEPS, as there are political and technical issues that still need to be resolved. However, the cover statement of the Inclusive Framework refers to the Blueprint as a "solid basis for future agreement". It states that the member jurisdictions have agreed to swiftly address the remaining issues to bring the process to a successful conclusion by the ambitious deadline of mid-2021.
A broad consensus will be critical to avoid ongoing unilateral action by many jurisdictions. As will be noted, the scope of BEPS 2.0 is significantly broader than European Union-style digital services taxes ("DSTs"). Based on an impact assessment performed by the OECD, Pillar One and Pillar Two could increase global corporate income tax revenues by about US$ 50-80 bn per year, and up to US$ 100 bn taking into account the impact of the Global Intangible Low-Taxed Income (“GILTI”) regime in the US. While this may enable political consensus of governments to repeal DSTs, it may also increase pushback from businesses based in the administrative and tax costs envisaged.
The aim of Pillar One is to reach a global agreement on adapting the allocation of taxing rights on business profits in a way that expands the taxing rights of market jurisdictions. In order to achieve this, Pillar One contains three elements:
Pillar One – Amount A
The following building blocks have been identified as essential to the construction of Amount A:
Pillar One – Amount B
Amount B will standardize the remuneration of related party distributors that perform "baseline marketing and distribution activities" in the market jurisdiction. Further, the activities in scope are first defined by a 'positive list' of typical functions performed, assets owned and risks assumed at arm's length by routine distributors and vice-versa by 'negative list'. Quantitative indicators would further support the identification of in-scope activities.
It should be noted that Amount B is intended to approximate results determined in accordance with the ALP. Amount B will apply to entities or PEs with existing nexus, and as such is not related to the new nexus rules of Amount A. Importantly, the scope limitations of Amount A relating to the activity tests and threshold tests are not applicable to Amount B.
Pillar One – Increased tax certainty
The Blueprint states that "tax certainty is a key component" of Pillar One and therefore, "innovative dispute prevention and dispute resolution mechanisms" are necessary. For this reason members of the Inclusive Framework agreed that in the event a dispute (i) related and (ii) beyond to Amount A might arise, appropriate mandatory binding dispute resolution mechanisms would be made available to MNEs.
Whilst certain details on thresholds and application are still to be confirmed, companies can already foresee how the rules may impact them and prepare accordingly. The following elements should be considered:
Pillar I will likely exclude companies in the extractive industries, financial services, infrastructure (including residential real estate), international air and shipping. The FinTech and pharmaceutical sectors may potentially remain in scope
Pillar One is expected to reallocate taxing rights to income of over US$ 100bn of profits between jurisdictions. Based on the latest blueprints, it could have the following implications:
The Pillar Two Blueprint presents details on the design of global minimum tax regimes which operate independently to ensure minimum levels of taxation for MNEs:
These are covered in further detail below:
The Blueprint recognizes that there may be member jurisdictions that will not implement the Pillar Two rules, but that all jurisdictions which do are expected to apply them consistently. It also notes the importance of the STTR to a large number of member jurisdictions, particularly developing countries, and states that such a rule will be an integral part of a Pillar Two agreement.
The Blueprint calls out the need to reach agreement on the basis on which the US GILTI rules are to be treated as a Pillar Two compliant income inclusion rule. The Blueprint further indicates that the Inclusive Framework recognizes that agreement on the co-existence of the GILTI rules and the GloBE rules need to be part of a political agreement on Pillar Two. Further consideration will be given to the technical aspects of the coordination between these rules, which will include consideration of the GILTI rules to US intermediate parent companies of foreign groups that are headquartered in countries that apply the IIR.
The Blueprint notes that the treatment of the GILTI rules as compliant with Pillar Two will need to be reviewed if legislative or regulatory changes were to materially narrow the GILTI tax base or reduce the tax rate. Concerning the UTPR that is intended to operate as a backstop to the IIR under Pillar Two, the Blueprint further notes that the Inclusive Framework "strongly encourages" the US to limit the operation of the Base Erosion and Anti-abuse Tax ("BEAT") in the case of payments to entities that are subject to a Pillar Two income inclusion rule.
The Blueprint acknowledges that both the STTR and the SOR would require changes to existing bilateral tax treaties. These could be implemented through bilateral negotiations and amendments to individual treaties or more efficiently through a multilateral instrument. Mutual agreement procedures could then apply to any disputes arising.
Pillar Two will likely apply a threshold for application, for instance, a consolidated group revenue of EUR 750 million in the preceding fiscal year. Investment funds, pension funds, governmental entities, international organizations, non-profit entities, and entities subject to tax neutrality regimes may be excluded from scope. There are currently no exceptions based on industry.
The Pillars are expected to bring additional income to tax in several jurisdictions. These are based on the following principles:
Given the rapidly evolving landscape and uncertainties, MNEs should stay informed about developments in BEPS 2.0 in order to determine how they are affected. However, they can already take the following steps:
In determining the most appropriate approach, companies have been able to leverage on KPMG's practical approach for support: