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Can consensus be reached by over 130 jurisdictions to fundamentally change the international tax environment, potentially increasing annual global corporation tax by up to US$80 billion? Anna Scally and Cillein Barry, tax partners with KPMG in Ireland, take a look at the developments.

According to the Organisation for Economic Co-operation and Development (OECD) the answer is yes, and by the middle of 2021. Indeed, in his Budget speech, Minister Donohoe acknowledged that “what is certain…is that change is inevitable”.

While the conclusion of the OECD’S Base Erosion and Profit Shifting (BEPS) initiative does not seem long ago, the OECD’s tax focus quickly moved to the tax challenges arising from digitisation, now commonly referred to as BEPS 2.0.

This week, the OECD published two reports, extending to some 480 pages, addressing the ‘Tax Challenges Arising from Digitisation’. These reports, referred to as “blueprints”, address what have come to be known as Pillar One and Pillar Two of BEPS 2.0. These blueprint reports are extensive and technical in nature.

Consensus has not (yet) been reached, but the OECD has launched a consultation period running to 14 December, with a view to reaching consensus by mid-2021. However, this may be difficult to achieve as many of the over 130 jurisdictions will have differing objectives — and some will be winners and others are likely to lose out.

Notwithstanding that BEPS 2.0 has its roots in addressing “the challenges arising from the digitalisation of the economy”, it will affect groups operating in a wide range of sectors, far beyond the digital economy.

Pillar One

Pillar One seeks to introduce a new international framework under which more of the profits of global multi-nationals (MNCs) would be allocated to market jurisdictions, using a formulaic approach.

While there is still significant work to do, a much clearer picture of how the formula might work was outlined in the blueprint.

The Pillar One provisions would apply to automated digital services (ADS) and consumer facing businesses (CFBs).

The Pillar One proposals could be introduced in waves, the first wave covering ADS’s, which would then be followed by application to CFB’s.

The calculations proposed are complex and take as a starting point consolidated profit of the group. It also looks at fixed threshold percentage profits and contemplates there being ranges of “acceptable” profit margins for certain businesses. Where a business exceeds the threshold profit percentages, part of the “excess profits” are allocated to the market jurisdictions that meet a nexus threshold.

MNCs will be in scope where global revenues exceed a certain threshold (€750m is suggested) and foreign source income exceeds a lower threshold in their consolidated accounts.

Disputes between countries are inevitable and it is also intended to introduce enhanced dispute resolution mechanisms.

It is intended that all countries signing up to these new proposals would be required to abandon unilateral measures that they have taken to tax the digital economy, like Digital Services Taxes.

Pillar Two

Pillar Two (known as GloBE, short for Global Anti-Base Erosion) seeks to implement a global minimum tax rate for MNCs on a jurisdiction by jurisdiction basis. There are four separate parts to GloBE which overall seek to impose additional tax liabilities where the effective tax rate paid by a MNC in any jurisdiction is below a set minimum rate.

It is proposed that Pillar Two would apply to MNCs with global revenues in excess of €750m. The effective tax rate will be based on de-consolidating the consolidated accounts of the parent company and therefore the accounting treatment will be key.

Whilst a 12.5% rate has been rumoured as the likely minimum rate, no agreement appears to have been reached on this yet.

Impact for Ireland and Irish businesses

Corporation Tax revenues have been remarkably resilient in Ireland in 2020, notwithstanding the COVID-19 crisis. And while Ireland will have to borrow significantly to fund Budget commitments, resilience of corporate tax revenue was important in framing Budget 2021.

There is a significant risk that Ireland will be one of the countries that stands to lose certain Corporate Tax revenues if these proposals are adopted, and this was acknowledged by the Minister in his budget speech. But it is felt that the risk of not reaching consensus also poses a significant risk to Ireland and it would continue to lead to the proliferation of additional Digital Services Taxes, such as what the UK and France have adopted.

The Pillar One proposals could see many Irish businesses, who act as global or regional headquarters, triggering additional tax obligations in local market jurisdictions.

The Pillar Two proposals are potentially significant. However, if a global minimum rate of 12.5%, as has been suggested, is ultimately agreed, the impact for Ireland may be relatively limited.

For Irish businesses of US parented groups, the interaction of Pillar Two with the US GILTI rules will be key. It also remains to be seen whether the impending US Presidential election will impact the US position on BEPS 2.0.

As final proposals move ever closer, it will be important for all large businesses who are likely to be in scope to understand the impact of these proposals on their business, and in particular, on their likely effective tax rate and on the additional resources required to comply with the complex measures. It will also be important to engage with the consultation process over the next few weeks and months.

If your business is potentially affected by these proposals, the time to act is now.

This article originally appeared in the Business Post and is reproduced here with their kind permission.

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