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BEPS 2.0 work programme

BEPS 2.0 work programme

BEPS 2.0 work programme

On 31 May 2019, the Organisation for Economic Cooperation and Development (OECD) released a programme of work for endorsement by the G20 to revise the international tax framework for taxing the digitalised economy.

Working under a global forum comprising 129 participating jurisdictions, the OECD is now seeking to broker a reform of the international tax system under the concept of developing a consensus solution to the tax challenges arising from digitalisation of the economy.

This is more than just a focus on highly digitised businesses. It could potentially affect businesses operating internationally across all sectors. It seeks to address ongoing concerns surrounding the impact on taxing rights in the digital age where technology can allow businesses across all sectors to centralise important business functions and operate more remotely from the market jurisdiction than in the past.

The work programme involves work under two pillars.

  • Pillar One seeks to readjust the balance of profit allocation and taxing rights related to the profits of multinational companies (MNCs) between jurisdictions where valuable intangible assets are owned and the markets where users/consumers are based. This involves developing an international framework for a new taxing right which would change current profit allocation and nexus rules. 
  • Pillar Two intersects with the work on a new taxing right and seeks to design a balancing set of measures under a Base Erosion and Profit Shifting (BEPS) heading. These are designed to address the risk of structures that shift profits to entities subject to no or very low taxation. This work will review the possibility of establishing income inclusion or switch-over rules as well as undertaxed payment or subject to tax rules that could allow jurisdictions to broaden the scope of taxing profits or denying deductions /reliefs where income is taxed at an effective rate below a global minimum tax rate.

In February 2019, the OECD held a consultation on a number of proposals for review under these two pillars. A significant number of responses were received and there was extensive engagement with stakeholders at public hearings held in Paris in March 2019. The 31 May release is the product of follow on work and discussions within the global forum to outline a work programme for endorsement by the G20.

If endorsed by the G20 finance ministers at their June 2019 meeting, work would proceed under the two pillars to analyse and develop a framework which has global consensus. The objective is to develop measures which will be set out in a report to be delivered in 2020 which have achieved consensus and are considered implementable by all participating jurisdictions.

Implementation would require jurisdictions to adopt the framework measures into their domestic law and also their network of bilateral tax treaties.

What’s in the OECD paper?

The work programme set out in the 31 May paper comprises a range of technical proposals which will firstly be subject to detailed economic and impact analyses. It is recognised that achieving an international consensus can only be done where participating jurisdictions understand the potential impact on tax revenues of a new taxing right under Pillar One and the BEPS 2.0 global minimum tax rate proposals under Pillar Two. 

Reaching a consensus will require both building political support to adopt the new framework and detailed technical work to develop implementing measures. This is required in order to meet the objectives of providing future stability and certainty of outcomes so that any new framework can support continued international economic growth. 

It is hoped that the outlines of an architecture for the two pillars can be agreed by January 2020. This very ambitious timeline is being set so that the next stage of agreeing a detailed design of the measures and implementing approach can be achieved by the end of 2020. 

Impact for businesses based in Ireland

The outcome of the work is potentially very significant for businesses in Ireland with international operations. Ireland is a small open economy where export revenues from the exploitation of high value intangible assets including market related intangibles, drive economic performance in many business sectors. The OECD paper acknowledges that a global consensus can only be reached where a new framework ensures a level playing field between all jurisdictions; large or small, developed or developing. Ireland’s policy makers are actively engaging in this work.

A revised international framework could affect business location choices for MNCs. A new framework of taxing rights could see more MNC profits attributed to large economies with large consumer populations. The design parameters of BEPS 2.0 work on defining a global effective minimum tax rate will be important in benchmarking if Ireland’s 12.5% corporation tax rate meets an effective minimum tax rate test. If it failed to do so, this could trigger the application of broader income taxing rights in a parent country as well as measures that seek to limit the scope of base eroding payments.  

The Irish Government is committed to resolving this debate within a multilateral framework with a view to developing a balanced and consensus-based international tax framework. The policy objective underpinning this very ambitious programme of work is to develop a robust and sustainable revised international framework that can provide stability and certainty of outcomes for businesses and governments alike in the years ahead. 

Further information

Read the OECD’s announcement and working paper here.

TaxWatch is KPMG’s client-only portal on tax insights. Registered TaxWatch users can read a more detailed analysis of the OECD’s paper, the timeline for this work and its likely impact here.

If you are not already registered for TaxWatch, you can sign up here.

If you believe that matters under review in the OECD BEPS 2.0 process could affect your business, please contact your KPMG team to have your voice heard in this debate.