On 12 October 2020 the OECD introduced a report on the Pillar Two Blueprint on digital economy taxation.
Pillar Two aims to ensure that large multinational enterprises pay a minimum level of tax regardless of the location of their headquarters and of the jurisdictions in which they operate. The rules aim to ensure minimum taxation while avoiding double taxation and coping with different types of tax system and business model. They also aim to maximise transparency and minimise compliance costs.
The income inclusion rule (IIR) and undertaxed payments rule (UTPR) act as a backstop. The operation of the IIR is similar to controlled foreign company (CFC) rules and includes income at the level of the shareholder if the income of a controlled foreign entity is taxed below the effective minimum tax rate. The switch-over rule (SOR) ensures that tax treaty provisions do not prevent its application to certain branch structures; and is applicable if a tax treaty would otherwise require a contracting state to adopt the exemption method.
The subject-to-tax rule (STTR) complements these rules. Denial of treaty benefits for certain deductible intra-group payments to low tax jurisdictions may help to protect the tax base of source countries.
The IIR and the UTPR do not require changes to tax treaty provisions and can be implemented through changes to domestic law. The STTR and the SOR require changes to bilateral tax treaties. These could be implemented through bilateral negotiations or through a multilateral convention.
Rule Coordination and Next Steps
To ensure rule co-ordination the Inclusive Framework on BEPS will develop model legislation and guidance, draft a multilateral review process and look at the use of a multilateral convention, to incorporate important aspects of Pillar Two.
Administrative and Compliance Considerations
The features have been designed to minimise compliance costs. Therefore the accounting consolidation rules are to be used to determine the scope of the provisions, reducing the need for further adjustments.
The accounting standards applicable to the parent company will be used and there will be limited tax adjustments. Groups will therefore not need to recompute the profits of each foreign group member to take into account their domestic accounting rules. The entity level financial information used to prepare the parent company’s accounts will be used.
The reporting thresholds and definitions are based on the country by country reporting rules and exclude multinational groups below the EUR 750 million gross revenue threshold. There is also a list of excluded entities.
The subject-to-tax rule will use a nominal tax rate test and will therefore avoid the administrative costs of using a test based on the effective tax rate.
Where possible Pillar Two uses clearly defined rules and formulaic approaches, to facilitate compliance and avoid tax disputes that could arise from subjective rules. Multinational enterprises have emphasised the importance of simplification measures to reduce the administrative burden from the Pillar Two rules.
Coordination with GILTI
Consideration will be given to how the Pillar Two rules can be coordinated with the US Global Intangible Low-Taxed Income (GILTI) provisions. The Inclusive Framework also suggests that the US should limit the application of the Base Erosion and Anti-abuse Tax (BEAT) in relation to payments to entities subject to the IIR under Pillar Two.
