On 31 May 2019, the OECD released on their website a detailed programme of work for the overhaul of international tax rules. This was endorsed by the 129 members of the Inclusive Framework on BEPS (IF) at their Paris meeting on 28/29 May and is set to be endorsed by G20 Finance Ministers at their Fukuoka meeting on 8/9 June.
The programme of work sets a highly ambitious January 2020 target for the IF to reach agreement on the new ‘architecture’ of international tax rules, with the granular details to be worked out subsequently. This means that the various Working Parties (WPs) and other IF subsidiary bodies, dealing with different aspects of the new rules, will have between June and the end of 2019 to draft the rules and perform the economic impact assessment. Once it becomes apparent whether agreement can be reached at IF level, multinational enterprises (MNEs) will need to start to assess the implications of the new rules for their global structures, supply chains, and business models. As elsewhere, this will have implications for business activity cross-border into and out of China.
The programme of work builds on a series of earlier OECD documents: the 2015 BEPS Action 1 report, the 2018 TFDE Interim Report, the January 2019 IF Policy Note, the February 2019 public consultation document (the latter is detailed in China Tax Alert Issue 7 of 2019), as well as a compilation of 2,000+ pages of comments from the March 2019 public consultation. These are all styled as dealing with the challenges of ‘tax and digitalization’, though the implications now go far beyond ‘highly digitalized businesses’. The programme is now more popularly called ‘BEPS 2.0’ in the tax media, though the term is not used formally by the OECD.
The public consultation document explained the differing rationales behind the three Pillar 1 proposals (separately proposed by UK, US and India) to allocate more MNE global profits to the countries of markets/users. The programme of work starts from the position that, as all three would involve a new remote taxable presence nexus rule, would make allocations out of total MNE profits, and would use simplifying conventions, there is enough in common for detailed technical work on the rule mechanics by the WPs to commence. A parallel process, likely to occur largely at IF Steering Group level, will seek political agreement on the objective and scope of a unified Pillar 1 approach.
For Pillar 1 the programme of work focuses on researching:
For Pillar 2 (the France-Germany proposal for a global minimum tax) the programme of work will examine how low-taxed controlled foreign companies (CFCs) in an MNE group can be subjected to top up tax at a fixed rate. For the residence country income inclusion rule this requires designing simplified approaches to determining effective tax rates (ETRs), deciding on whether CFC profit and tax ‘blending’ should be on a worldwide or jurisdictional basis, and whether there should be substance-based or sector exclusions. Research will also focus on the design of the base erosion rules, and the necessary administrative coordination, information exchange, and record keeping requirements.
The economic impact assessment will examine in detail the effect of different rule designs on tax revenue distribution, different types of economy, and on MNE investment. For all the above work streams the allocation of tasks to specific WPs and other subsidiary bodies (e.g. TFDE, FTA MAP Forum) is defined, with much of the work to be completed by the end of 2019.
It is increasingly clear that major changes are coming for international tax rules. The agreement of the programme of work by the IF members can be seen to reflect growing acceptance of the need for new nexus and profit allocation rules under Pillar 1. It remains to be seen whether agreement can be struck between:
[Both may be seen to favour modest additional profit allocations to market countries]
It also remains to be seen what becomes of the Pillar 2 rules, on which opinion is more divided, such as whether these will ultimately be put forward as best practices alongside minimum standard Pillar 1 rules, or otherwise limited in their ambition.
Over the course of the next half year it should become apparent whether technical work at WP level and political discussions at IF Steering Group level (in both of which China will play a major role) are tending towards agreement. As clarity emerges on this, MNEs will, for Pillar 1, need to undertake detailed work on the following:
Further detailed analysis may be required for the Pillar 2 rules, and tax advisors will play a crucial role in assisting with such matters.