February 21, 2022
OECD Tax Talk provides insight on BEPS 2.0
The OECD February 21 provided insight into the schedule of releases and consultations in relation to the project on Addressing the Tax Challenges Arising from the Digitalization of the Economy (the so-called BEPS 2.0 project), including Pillar One and Pillar Two consultations, and officials generally said they have heard frustrations about the project and are working to address them.
The Tax Talk webinar, the first in a year, followed the release of the G20 Communiqué, which said: "To ensure the swift global implementation of the historic OECD/G20 two-pillar international tax package agreed in 2021, we commit to develop the model rules and multilateral instruments according to the timetable provided in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023. We welcome the technical design of the Global anti-base erosion Model Rules for Pillar 2 adopted by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), and call for their finalization and consistent implementation at a global level as a common approach. We also welcome the ongoing development of the Multilateral Convention for Pillar 1."
The ambitious timeline re-endorsed by the G20 for Pillar One, including having a final multilateral instrument, model rules for inclusion in domestic legislation, and a commentary completed by the middle of the year, necessarily requires the development of detailed rules over the next few months. The release of initial blocks of those rules as drafts for consultation purposes and the quick turnaround deadlines for comments was a key topic of today's webinar, and OECD officials noted that stakeholders have become increasingly frustrated with the rush to develop these rules.
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, said of the project, "the political momentum has not gone away; it's still here and extremely forceful." Achim Pross, Head, International Co-operation and Tax Administration Division, said during the webinar, with regard to Pillar One, officials "do understand some of the frustrations that are out there, and we are trying to address them … with as much engagement as is possible within the overall timelines that we have," which some have observed are tight in terms of turnaround.
Tomorrow, OECD is expecting to publish comments received related to the draft nexus and revenue sourcing rules the OECD released February 4 in connection with Pillar One. On Friday, OECD issued the next block of draft rules, seeking public comments, on Tax Base Determinations for Amount A of Pillar One. During the webinar, the Secretariat Pillar One Team explained the Inclusive Framework agreed to release public consultation documents to obtain public comments, "but the draft rules do not reflect consensus regarding the substance of the document." Comments on the draft Tax Base rules are due no later than March 4.
With the drafts on revenue sourcing and nexus and tax base out, Pross said other blocks of Pillar One will be released on a rolling basis once the scoping rules are "stabilized." As identified in the webinar, the remaining building blocks include exclusions from Amount A for extractives and regulated financial services, followed by tax certainty, elimination of double taxation, and segmentation. On tax certainty, the OECD intends to design a tax certainty process that will have a binding resolution. He added that certainty for Amount A is about both Amount A and the items related to Amount A that will produce draft rules that address a total tax certainty package. The Task Force on the Digital Economy also continues technical work on other aspects.
Melissa Dejong, Senior Advisor, International Co-operation and Tax Administration Division, said the finished goods rule in the revenue sourcing rules starts with direct sales then moves to distributors. There has been some feedback about reporting on a massive scale and the impracticability of thinking taxpayers can change contracts, realizing contract changes implicate more than tax. Similarly, feedback also explained the challenges in rules that require new information from customers, including commercial sensitivities.
The OECD provided an overview of the global minimum tax rules (or GloBE rules) that confirmed the basics of the rule — a 15% jurisdictional ETR, assessed generally on a top-down approach. However, the ordering for the qualified domestic minimum tax (QDMT), newly released in the December 2020 Model Rules, was highlighted as a provision that would be applied first in determining the appropriate jurisdiction to which any top-up tax would be owed. Thus, if a jurisdiction adopts a QDMT, it will have the first right to collect tax, while a jurisdiction that adopts the income inclusion rule will have the right to collect tax (on a top-down basis) only when there is not a QDMT in a local jurisdiction. The undertaxed payments rule (UTPR) was identified as the third and last step in determining the jurisdiction to which tax could be owed but was not discussed.
Pross presented a Pillar Two timeline, saying they are in the finishing touches of the commentary that should be coming out shortly. While the question of GILTI co-existence was identified as a February or March task, there was no further discussion or mention of GILTI co-existence. It seems once the commentary is released, the OECD will turn to meet their goal for a February/March public consultation on implementation, rules that are intended to deliver intended outcomes with a sensible compliance burden, including safe harbors and simplified tax administration processes.
On the subject to tax rule, Lee Harley, Head, Tax Treaty Unit, presented the work streams as: STTR model treaty provision, commentary, the process to assist in implementing, and a multilateral instrument. He said OECD is developing a new multilateral instrument to facilitate swift and coordinated implementation of the STTR in affected tax treaties, which is envisioned to be similar to the BEPS MLI and modify the application of existing treaties to give effect to the rule. As identified in the October 2021 Inclusive Framework agreement, the STTR will apply to royalties, interests and other payments that remain under discussion.
He said the finalizing development of the model treaty provision and associated commentary is expected to be worked through to the end of March, and the implementation work and process to support jurisdictions is envisioned to be in place by the middle of 2022, when the MLI to facilitate the implementation of the STTR will be open for signature. The development of the MLI and the explanatory statement must be complete so it can be agreed to and open for signature in the ceremony planned for mid-2022. He said there will be separate drafts in March 2022 on the model treaty provision and the MLI.
Asked during Q&A what measures have been taken to soften complexity and avoid double or multiple taxation, Pross said there is more to come on the safe harbor, etc., on implementation. On Pillar Two, it took people quite a bit to design the rules and think about the implications, including scoping. On Pillar One, probably the biggest simplification is the scope limit, he said. For those in scope, they are trying to make the rules workable and build on existing data systems and are listening to companies and trying to work with them.
A replay is available here.