On 8 November 2019 the OECD issued a consultation document in relation to the tax challenges of digitalisation of the economy entitled Global Anti-Base Erosion (GloBE) – Pillar Two.

The GloBE proposal aims to develop a co-ordinated set of rules to deal with ongoing risks from structures used by MNEs to shift profits to jurisdictions where they are subject to low or no taxation. The proposal aims to ensure that international businesses pay a minimum level of tax.

The four components of the proposal are:

Income Inclusion Rule

The income inclusion rule would tax the income of a foreign branch or a controlled entity if the income was subject to a low effective tax rate in the residence jurisdiction.

Undertaxed payments rule

This would involve the denial of a tax deduction or the imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate.

Switch-over rule

The switch-over rule for tax treaties would permit the residence state to apply the credit method instead of the exemption method where profits attributable to a permanent establishment (PE), or derived from immovable property that is not part of a PE, are subject to tax at an effective rate that is below the minimum rate.

Subject to tax rule

This would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.

Implementation

The rules would be implemented by amendments to national tax laws and changes to double tax agreements. By implementing these changes the GloBE proposal would ensure that profits of multinational businesses are subject to a minimum level of tax. Key design issues to be addressed include definition of the tax base; the blending of high tax and low tax income; and carve-outs, thresholds and exclusions from the rules.

The GloBE proposal will operate as a top-up to an agreed fixed rate. The actual rate of tax to be applied under the GloBE proposal will be discussed once other key design elements of the proposal are fully developed

Comments requested

Comments are requested on three technical design aspects of the GloBE proposal:
• the use of financial accounts as a starting point for determining the tax base under the GloBE proposal, and mechanisms to deal with timing differences;
• how far an MNE can combine high-tax and low-tax income from different sources taking into account the relevant taxes on such income in determining the blended tax rate on the income; and
• the experience of commentators with carve-outs and thresholds similar to those in the GloBE proposal and their views on this.

Comments are invited on the proposal by 2 December 2019.