On 12 October 2020, the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS) released ‘blueprints’ on Pillar 1 and Pillar 2, which reflect the efforts made towards reaching a multilateral, consensus-based solution to the tax challenges arising from the digitalisation of the economy.
The updated blueprints provide detail on the technical design and features of each pillar, identify areas that require further technical work and highlight aspects where political agreement will be necessary. The OECD is targeting bringing the process to a successful conclusion by mid-2021.
BEPS 2.0 is primarily aimed at dealing with the tax challenges arising from the digitalisation of the economy but the proposals will impact all sectors. Our comments below consider what the proposals might mean for the oil and gas sector.
The oil and gas sector by its nature is generally subject to higher rates of taxation and as such Pillar 2, which aims to apply a minimum level of taxation is not specifically targeting the sector. However, depending on its final form there is a risk Pillar 2 may apply to the oil and gas sector and result in an increased ETR. We set out below the areas of potential complexity.
As noted above there are a number of complexities in applying BEPS 2.0 principles to the oil and gas sector. We recommend that companies in the sector keep a watchful eye as matters progress in order to understand how the rules will be implemented in practice to upstream activities and the resultant impact on ETRs.