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June 30, 2022

OECD and country officials discuss BEPS 2.0 Pillars One and Two and other OECD tax work

Executive summary

The Organisation for Economic Co-operation and Development (OECD) held its annual tax conference in Washington, DC, on 27-28 June 2022, following a pandemic-related hiatus since the June 2019 conference. The bulk of the discussion at the conference focused on developments with respect to Pillars One and Two of the ongoing project on addressing the tax challenges of the digitalization of the economy (the so-called Base Erosion and Profit Shifting (BEPS) 2.0 project). In addition, there were sessions on the OECD's work on global mobility of workers, tax and climate change, and tax certainty.

Senior members of the OECD Secretariat participated in the conference, along with tax officials from several OECD and G20 countries who are responsible for their countries' participation in the tax work of the OECD, including officials from France, Germany, Italy, the United Kingdom (UK), and the United States (US).

Highlights from the conference discussion of the BEPS 2.0 project include the following key points:

  • On Pillar One on new nexus and profit allocation rules, OECD Secretariat and government panelists acknowledged the political and technical headwinds facing implementation of the new taxing right for market jurisdictions and expressed the intention to spend more time seeking business input and demonstrating how the building blocks of Pillar One, including eliminating double taxation and providing tax certainty, should work in practice. Accordingly, the OECD is resetting the Pillar One timeline and intends to release a new consolidated consultation document in July for comment by stakeholders.
  • Also on Pillar One, government officials and business representatives drew some lines in the sand. US Treasury officials, for example, forcefully contended that the new allocation of profits to market jurisdictions under Pillar One Amount A cannot be accompanied by unilateral measures that would tax additional profits and that withholding taxes need to be in scope in determining profit allocations. Business representatives indicated that a carve out for domestic profits and an effective Pillar One Amount B on standardized returns for baseline distribution activity that is aimed at creating more transfer pricing certainty for businesses may be necessary for them to be able to support Pillar One, which may be essential in any effort to gain political support in the US Congress for a multilateral agreement.
  • On Pillar Two on global minimum tax rules, the OECD Secretariat and several government panelists sought to eliminate doubt that enactment of changes to the US global intangible low-taxed income (GILTI) regime included in the House-passed Build Back Better legislation would result in the amended GILTI provisions being considered to be a qualified income inclusion rule (IIR) for Pillar Two purposes. One senior US Treasury official expressed confidence that these changes will be enacted in the next several weeks; another US Treasury official discussed the treatment of the current GILTI regime as a controlled foreign corporation (CFC) regime for Pillar Two purposes and provided a high-level overview of approaches for rules on how to "push down" GILTI taxes for allocation to foreign countries as Covered Taxes under Pillar Two.
  • European government panelists expressed confidence that Pillar Two will be implemented in all or most of the European Union (EU), despite the fact that an objection by one Member State currently is preventing the unanimous agreement required on the proposed EU Pillar Two Directive.
  • The OECD Secretariat described five ongoing workstreams with respect to the Pillar Two implementation framework and announced that items of administrative guidance that are developed as part of this process will be released as they are completed, with the first guidance items expected to be released soon.
  • The debate over how tax incentives, including US tax credits such as the research and development (R&D) tax credit, should be treated under Pillar Two continued, with OECD Secretariat and US Treasury panelists defending the treatment reflected in the Model Global Anti-Base Erosion (GloBE) Rules under Pillar Two while business panelists sharply criticized the treatment and urged a reconsideration of those rules.

Detailed discussion

The OECD's tax conference in Washington, DC, which was last held in June 2019 shortly after the release of the initial workplan for the BEPS 2.0 project, provided an opportunity for dialogue about the latest developments with respect to Pillars One and Two as well as other tax work of the OECD. The panels for the discussion sessions consisted of members of the OECD Secretariat, country tax officials, and business community representatives.

Opening remarks

At the opening of the conference, Fabrizia Lapecorella, who chairs the OECD Committee on Fiscal Affairs and is Director General of Finance for the Italian Ministry of Finance, provided her perspectives on the BEPS 2.0 project as well as other ongoing tax work at the OECD. She began by expressing appreciation for this annual dialogue among the OECD, governments and the US business community.

On the BEPS 2.0 project, Lapecorella noted the October 2021 political agreement on key parameters of the two pillars joined by 137 of the jurisdictions participating in the BEPS 2.0 project through the Inclusive Framework. She described the current status of the project as the incredibly challenging implementation phase. On Pillar Two on the global minimum tax, following the October 2021 agreement, the Inclusive Framework worked around the clock to produce the Model GloBE Rules and then continued to work another two months to produce the related Commentary. She described this work as having delivered what countries need to legislate with respect to the global minimum tax. She also highlighted the ongoing work on the implementation framework to address the practical aspects of the implementation and operation of these new rules. She further indicated that the work on the Subject to Tax Rule element of Pillar Two would be completed later this year.

On Pillar One on new nexus and profit allocation rules, Lapecorella referred to the challenging and complex negotiations that are ongoing in the Inclusive Framework and indicated that good progress is being made. Beyond BEPS 2.0, she highlighted the planned work on carbon mitigation, noting the vulnerabilities of fossil fuel reliance. She concluded by citing the increase in global mobility of workers and the need to address the tax implications of this development for the medium and long term.

Representatives of the US Council on International Business, which hosted this conference, highlighted the benefit that could be achieved through the current work of the OECD and the Inclusive Framework in terms of the potential for a more stable global tax system and the need to avoid the risks that would be associated with failure of these efforts. They also stressed the importance of governments and business consulting together in order to achieve success.

Two-pillar solution to tax challenges of digitalization of the economy

The first panel provided an update on the current status of the BEPS 2.0 project and the planned next steps. The panel was led by Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, and included Itai Grinberg, Deputy Assistant Secretary for Multilateral Tax in the Office of Tax Policy of the US Department of the Treasury, and Martin Kreienbaum, Director General, International Taxation for the German Federal Ministry of Finance.

Saint-Amans began by linking the current project to the original Base Erosion and Profit Shifting (BEPS) project that culminated with the issuance of final reports on fifteen Action areas in 2015, describing the outcomes of Action 1 (Digitalization), Action 3 (Controlled foreign companies) and Actions 8-10 (Transfer pricing) as "not the most conclusive." This led to the development of Pillars One and Two, with political agreement reached in October 2021 and an "extremely ambitious" timeline set for implementation. On Pillar Two, he noted the delivery of the Model GloBE Rules and the related Commentary and described the implementation framework for these rules as something that is still owed to the business community and tax administrations.

Saint-Amans and other panelists acknowledged that the Multilateral Convention on Pillar One would not be ready for signature in July as was the target in the agreed timeline. However, he indicated that an enormous amount of work has been done. He further indicated that the timeline will be reset to provide more time to complete the work and obtain business input and that a consolidated consultation document with details on most of the building blocks of Pillar One, including revised versions of some of the building blocks previously released for consultation, will be released in July for stakeholder comment.

Kreienbaum emphasized that Germany is a strong believer in multilateralism, noting that multilateralism was in the self-interest of Germany. He said at stake in the BEPS 2.0 project is stability of the international tax architecture, what he described as a "a new world order" that would include predictability for taxpayers and absence of double or multiple taxation. He stressed the need for very clear rules, particularly because the Inclusive Framework includes members with very different perspectives on tax matters.

Grinberg said that the US Biden Administration also is deeply committed to multilateralism. He described Pillar Two as helping to level the playing field, which he said is what the US business community has been asking for. He said the new Pillar Two rules ask businesses to pay modestly more in tax in order to provide equity for the middle class. He expressed the view that these new rules work to the benefit of US businesses and our kids.

Grinberg further described Pillar One as essential to the stability of the global tax system. He acknowledged the need for a realistic timeline to complete the work on Pillar One, stressing the importance of balancing the need to get this right, including getting business and congressional input, with what he referred to as the real and urgent need for the changes.

The business representatives focused on the importance of stability, dispute resolution and an administrable system. They noted that good tax policy is essential to sustainable inclusive growth and stressed the need for certainty with respect to both pillars. A question was raised about the appropriateness of the US moving ahead with changes to the GILTI rules before other countries have implemented Pillar Two rules. The need to take the time to get it right was stressed.

In response to a concern raised by a business representative about the treatment of the US R&D tax credit under the Model GloBE Rules, Grinberg expressed support for the treatment of such tax incentives under the Model Rules and commitment to working with Congress to preserve the benefit of the credit. However, he also indicated that concerns about the impact of a potentially diminished US R&D incentive may be overblown, stating that there are practical questions about what the R&D tax incentive does and noting that "a whole research ecosystem doesn't generally just pick up and move."

Pillar One — Part I

This session provided further discussion about the consolidated consultation document on Pillar One Amount A to be released in July, the need for a new timeline for the completion of the work, and the overall design of Pillar One Amount A and some of the key aspects of Amount A, such as revenue sourcing, nexus and tax base. The panel was led by Achim Pross, Head of the International Cooperation and Tax Administration Division in the OECD Centre for Tax Policy and Administration, and also included Gaël Perraud, Co-Chair of the OECD Task Force on the Digital Economy and Director of International Taxation and European Affairs for the French Ministry of Economy and Finance, and Itai Grinberg.

Pross acknowledged the complexity inherent in Pillar One and noted that there will be winners and losers with respect to effective tax rates. He emphasized, however, that the current system is not stable and that implementing Pillar One would eliminate unilateral measures, such as digital services taxes (DSTs), and trade disputes, leading to a stable, predictable corporate tax environment.

Pross indicated that the public consultation document to be released in July will address key aspects of Pillar One, such as:

  • The Marketing and Distribution Profits Safe Harbor (MDSH), addressing how to prevent double counting under Amount A
  • Rules for elimination of double taxation
  • Interaction with withholding taxes
  • Revenue sourcing
  • Tax base
  • The exclusions for extractives and regulated financial services businesses

Grinberg indicated that the trade-offs inherent in Pillar One would be acceptable to the US Treasury Department and to the US business community only if the income allocation is fair and income is not exposed to double or multiple taxation. He pointed out the need to eliminate unilateral measures, particularly those that discriminate against US-based companies. Thus, a system that includes Pillar One Amount A but still allows countries to use inconsistent and novel enforcement efforts or to impose measures that collect tax on additional residual profits would not be acceptable to the US Treasury Department. He stated that some countries take the view that withholding taxes should be outside the scope of Amount A, but that the US opposes this view. He also noted that much of the effort in reaching consensus has come from trying to reconcile the views of countries with developed economies with those of countries with developing economies and natural resource rich countries.

Perraud defended the DSTs that have been implemented by several countries but stressed that the global solution offered by Pillar One is necessary. He expressed the view that time is of essence in finalizing the OECD's work product, noting the need to avoid reopening issues that were settled in the Inclusive Framework's October 2021 political agreement. At the same time, his comments supported providing time for stakeholder input. He noted that the consolidated consultation document will show how the pieces of Amount A fit together, which will help demonstrate the momentum for the project to move forward. He confirmed France's commitment to remove its DST with the adoption of Pillar One. He described tax certainty as important for everyone and said that Pillar One will not fly unless the process is efficient and timely.

A business representative commented that using 25% of residual profits for Amount A is the maximum that would be acceptable. It was further noted that the US is the largest integrated economy in the world and, as a result, business in the US is generally more profitable than in other economies, with the suggestion that this reality needs to be recognized in the final design because the US Congress will need to see that the US would not be giving up US taxation on US domestic income. In this regard, a domestic business exemption rule would be helpful, along with a properly constructed Amount B aimed at reducing transfer pricing disputes. In response to the request for a domestic business exemption, Grinberg said drafting such a rule would be very difficult from a technical perspective, but he also noted the importance such a rule might have in terms of gaining the support of the US Congress. He indicated that a proxy for a domestic business exemption might be included in the consolidated consultation document.

Another business representative noted that the dynamic nature of companies means that the group of companies in scope of Pillar One will be constantly changing and that the companies that remain subject to Pillar One will likely be very different after several years. This dynamic means that rules regarding nexus, scope and sourcing will become complicated and unstable. It was suggested that governments will need to rely on companies' financial statements, how they measure themselves, how they report, and how they segment to deal with the dynamic nature of the companies. Moreover, given both the size of the companies and the design of Pillar One itself which includes the inherent use of proxies for establishing the tax base, there is a critical need for backstops, including a cap on Amount B and coordination rules between Amount A and Amount B and between Pillar One and Pillar Two.

Keynote address

In his keynote address, Pascal Saint-Amans largely focused on issues other than Pillars One and Two, including highlighting the OECD's report to G7 Finance Ministers, delivered for their meeting in Bonn in May, on the sharing of information with national tax administrations through an integrated system.

Saint-Amans said tax administrations realized the weaknesses and limitations of the current situation and decided to work to see "how they can better leverage digitalization of the economy." The administrations decided to use the OECD and the Forum on Tax Administration to consider how to change the model and become more efficient to reduce the cost of compliance and the tax gap. A December 2020 report, "Tax Administration 3.0: The Digital Transformation of Tax Administration," focuses on a new model of tax administration where processes increasingly focus on the natural systems of taxpayers, which Saint-Amans distinguished from trying to obtain tax information "here and there." There are many different models that are emerging, with the goal of providing tax certainty and compliance by design, he said.

Saint-Amans said the Forum on Tax Administration will meet in Sydney in September 2022 and will discuss this along with the implications of Pillars One and Two. Tax commissioners are extremely concerned about the feasibility of implementing the two pillars and want to be part of the decision-making over the design of the rules to be sure they can be properly implemented, he said. This includes design, information exchange instruments, and the training of tax administration personnel.

When you look at state of the world today, it is concerning, Saint-Amans said. "The world is scary," he said, adding that the war in Ukraine is a "tragedy" and it probably announces a fragmentation of the world that we have not measured yet and do not currently know where it stops. It is part of the landscape, and we do not know how tax fits, but it fits in an environment of crisis that probably results in establishing like-mindedness to cooperate, he noted.

The challenges we are facing are global challenges, Saint-Amans said, noting three of the major challenges in particular. First, the need to address climate change and the price of carbon, whether explicitly or implicitly, will be, through the impact on related prices, instrumental in limiting the emission of CO2, Saint-Amans said. The newly established Inclusive Forum on Carbon Mitigation Approaches is not about increasing carbon taxes but finding a path to measure what is existing through price-based and non-price-based instruments. A second global issue is mobility: whether people are returning to the office and where they are working instead. A third issue is gender balance and the tax consequences of gender balance or the tax bias against women, with a goal of making sure we have systems that are designed without bias.

Pillar One — Part II

The second panel on Pillar One was also led by the OECD's Achim Pross and included Michael Plowgian, Co-Chair of the OECD Task Force on the Digital Economy and Counsellor in the Office of Tax Policy of the US Treasury Department, and Mike Williams, Director Business and International Tax for the UK's HM Treasury.

Williams stressed that there is a clear overall purpose to the Pillar One endeavor: a fairer and more stable set of international tax rules. He also noted that this has been a matter of significant discussion and compromise among Inclusive Framework countries, with exactly this objective in mind. He cited as one example the consensus on the 25% profit allocation percentage in the October 2021 agreement, which is notable in light of the number of countries that wanted the percentage to be significantly higher. He said that the spirit of compromise continues in the deliberations. Williams also indicated that the UK DST will be abolished "when the long-term solution is in place."

Plowgian focused on two key aspects of Pillar One: elimination of double taxation and the MDSH: "The MDSH addresses how we avoid double counting. If the market already taxes residual profits, that should offset the Amount A liability." He also described specific aspects of the MDSH that are under discussion at the OECD, noting that: "It needs to be formulaic, and capture a return based on some measure of substance, such as assets and payroll." He stated that a return based on sales is also being considered.

With respect to elimination of double taxation, Plowgian said that a key premise of the discussions is that the existing system of double-tax relief would not work. Delegates do not want to introduce transfer pricing concepts into Amount A, including for the calculations associated with paying jurisdictions: "The basic idea is that elimination comes first from the jurisdiction that has the highest return on a measure of substance, and then works down the chain." The measure of substance, like in the MDSH, could be some combination of tangible assets and payroll.

The panel also discussed the appropriate treatment of withholding taxes under the MDSH. Both Williams and Plowgian agreed that if withholding taxes were left out of the calculation, then countries would have an obvious incentive to increase withholding taxes. Such withholding taxes do, in fact, reflect an assertion of jurisdictional taxing rights that should be accounted for. This is another area in which there is not consensus among Inclusive Framework jurisdictions, and the OECD will be looking for further stakeholder comments.

In response to a business representative noting the abbreviated comment periods for the Pillar One consultation documents that have been released to date, Pross noted that the consultation process was by no means merely pro-forma, and that the consolidated consultation document expected to be released in July will show important modifications made in response to stakeholder comments: "You will see that we made a lot of changes because of business input. That is certainly true about revenue sourcing, for example." He further noted that a longer period for comment for the upcoming release should further mitigate this concern.

In response to observations from business representatives that implementation of the Pillar One Amount A rules will be very complex, both Williams and Pross acknowledged the point. Pross commented that "while the design for Pillar One is not easy, part of the perceived complexity might derive from its newness. After some initial administrative difficulties, perhaps part of the complexity will go away." Williams further observed that "there is indeed complexity in Pillar One, but there is also complexity in the business groups that are subject to Pillar One. There are also significant complexities in transfer pricing, such as transactions that simply do not take place between unrelated parties. We definitely need to flag complexities, but we should be realistic about the fact that some complexities should be expected under any system." With respect to Pillar One Amount B on providing standardized remuneration for routine distribution activities, Pross noted its importance, and said that this is something that OECD countries have actually been trying to achieve for decades. He stated that, while it would be good to have a broader application of Amount B, "we first have to get this Amount B off the ground." Plowgian agreed that Amount B is a very important part of the benefit that businesses are supposed to get under the broader BEPS 2.0 project. He stressed that a key part of this is to have tax certainty on an up-front basis.

Increased global mobility of workers

The focus of this session was the tax implications of the notable increase in worker mobility. This discussion was identified as the first of two pressing issues that the OECD plans to focus on in the near future (the second being tax and climate change, discussed on the next panel). Led by Grace Perez-Navarro, Deputy Director, OECD Centre for Tax Policy and Administration, the panel also included Mike Williams of the UK's HM Treasury.

Perez-Navarro opened the session with an overview of the myriad issues raised by the increased global mobility of workers, particularly as the world moves past the COVID-19 pandemic. She emphasized that under current tax rules, "where people work matters" with respect to the sourcing and driving of revenue on an individual level (including payroll, pension benefits and local and federal tax and sales and consumption taxes). With increased worker mobility, she observed, application of these existing laws is far-reaching: unintended permanent establishment (PE) creation and accompanying taxation of profits, transfer pricing impacts and value added tax issues. For governments attempting to implement these rules, the tax administrative burden can be daunting, including difficulties with the availability and reporting of relevant information and increased personal income tax competition among various governments attempting to attract highly-skilled workers with tax and immigration incentives. Perez-Navarro noted that the OECD is well aware of these emergent issues in the post-COVID-19 world and that, other than the COVID-19 crisis guidance it issued in 2020, no work has yet been done on developing additional guidance on these issues but that the plan is to start to do so in 2023.

Following this introduction was a lively discussion of what, if any, modifications should be made in the underlying approach to taxation of businesses in light of the reality of a more nomadic workforce. Williams started with a practical question, emphasizing prudency in approach: has there been a sufficient change in the way of working that would require changes in the law, including tax treaties, which are difficult to modify? And, if so, what should be the depth of and parameters around changes in the law? For example, an employee whose activities include advertising for its employer from their place of residence and even physically meeting with clients raises a larger concern than employees simply working remotely, especially considering that many countries often allow visitors for up to 183 days.

These comments led to the panel's consideration of three scenarios in which remote work can occur: (1) a company has no fixed place of business and its employees permanently work remotely; (2) a company with a hybrid working environment in which employees have the flexibility to work in-office or remotely; and (3) a global nomad model where individuals choose which location they perform their work regardless of company location and where jurisdictions may compete to be the place where the individual resides. Panelists agreed that the second scenario tends to be seen the most often.

Williams reiterated that current rules, including treaty agreements, were not drafted to address these types of scenarios and that it would be valuable for the OECD to provide guidance for consistent rules. It was noted that PE rules that focus on 183 days of physical presence in a country make less sense in these situations and that consideration needs to be given to conflicts that could arise if an employer were to file a PE return with respect to an employee whose presence in a country was only authorized under a visitor, and not work, visa.

With respect to profit allocation and transfer pricing issues, a fair bit of consideration was given to whether there is a need to modify the so-called DEMPE rules, which look to the intangibles-related activities of development, enhancement, maintenance, protection, and exploitation and which were developed under BEPS Actions 8-10 and incorporated in the OECD Transfer Pricing Guidelines in 2015 to address the remuneration for highly valuable and risky intangibles. It was noted that the current rules focus on identifying the location of high-value functions (e.g., the location of persons who have control or oversight powers) as a proxy for determining profit allocation. It was further noted that if an employee does not play such a function, there should be no PE created in such employee's physical location. One of the business representatives pointed out that the original issue being addressed by the DEMPE rules was taxation in light of mobility of functions; the solution adopted was to attach taxation to people. However, now people too are mobile, thus decreasing the reliability of a physical presence test. Ultimately, with Williams again stressing the need for prudence with respect to the scope of any contemplated changes to current rules without first determining the severity of the problem, the panelists agreed that the DEMPE rules still have value and that it would be a big lift to significantly modify these rules (the original drafting of which took a fair amount of time). The panel ended with agreement that all of the above factors will likely play some role in any changes that are adopted (i.e., consideration of the scope of changes needed, ability to leverage current rules on physical presence and the DEMPE rules and the value, if any, being added by mobile employees in comparison to the business' central location or locations).

Tax and climate change

The panel on tax and climate change was led by Saint-Amans and included Lapecorella. The discussion focused on various approaches for carbon reduction on the heels of the launch, at the 10 June OECD Ministerial Council Meeting, of the Inclusive Forum on Carbon Mitigation Approaches, which has as its goal to collect tax data and find common methodologies to benchmark the different ways of pricing carbon and what the consequences of each are.

It was noted that there is a wide range of policies in this area, including price-based instruments with explicit carbon pricing (e.g., emissions trading and carbon taxes), other price-based instruments (e.g., taxes on vehicles and different corporate tax incentives) and non-price-based instruments.

Saint-Amans said there is no methodology to reconcile all these different paths and to try to benchmark efficiency and effectiveness. The G20 Finance Ministers want to get the numbers right before taking action and improve benchmarking on how climate policies compare. The benchmarking will involve stock-taking and mapping of policies, estimating the impacts on emissions, and comparing the efficiencies of mitigation strategies. He noted that the OECD has produced a survey on effective carbon rates.

Lapecorella said tax policy can support a green transition, incentivize low-carbon behaviors, discourage carbon-intensive choices, and raise revenue to mitigate the negative social impact of climate policies. Saint-Amans added that the price of carbon and the related tax debate of the next 10 years will be connected to trade and possible tensions between countries, noting the link between tax policies, tax burdens, and other forms of prices, in particular emissions trading systems. He said it is a "paradoxical situation" to be exploring ways to increase the price of carbon to address climate change or find ways equivalent to increasing the price on carbon at a time when prices are skyrocketing and, instead of moving investment to the least-intensive carbon means, we are burning more coal.

Business representatives commented that the US relies largely on the incentive model, with tax incentives as a primary tool to advance energy policies. It was noted that these tax credits in the US are not permanent and need to be extended through legislation, often at the last minute.

Pillar Two — Global minimum tax

This session focused on Pillar Two, providing an update on recent developments and outlining important work that is ongoing or yet to come. The panel was led by John Peterson, Head of the Aggressive Tax Planning Unit in the OECD Centre for Tax Policy and Administration, and included Rebecca Kysar, Counselor to the Assistant Secretary for Tax Policy of the US Treasury Department; Isaac Wood, Attorney-Advisor in the Office of Tax Policy of the US Treasury Department; and Martin Kreienbaum of the German Federal Ministry of Finance.

Peterson began the discussion by presenting the five workstreams that are now underway in the development the implementation framework:

  • The coordination of the GloBE rules and rule order, as well as the development of the peer review process
  • Additional guidance interpreting the Model GloBE Rules
  • The GloBE information return and rule relating to the return
  • Safe harbors
  • "Tax capacity building," allowing for a system to provide tax administrations with guidance and technical assistance to help implement the rules.

Peterson provided some further elaboration on the five workstreams on the implementation framework for the GloBE rules. He noted that a peer review and tax certainty process will be set up to determine whether jurisdictions' GloBE and Domestic Minimum Tax rules are "qualified," as well as to address rule order and coordination. Additional work is ongoing to identify other areas where similar processes are required (e.g., Covered Taxes and Qualified Refundable Tax Credits). Work is also ongoing on development of administrative guidance, with priority given to guidance that is needed for countries to be able legislate to implement the rules. In addition, a process for identification and timely, consistent resolution of interpretation issues is being developed. The OECD expects to release administrative guidance on a piecemeal basis as soon as each item of guidance is finalized.

Peterson also provided an overview of the GloBE calculation, highlighting particular aspects of the determination. The definition of multinational enterprise (MNE) Group for purposes of the GloBE rules is done by reference to the accounting consolidation standard. This was a choice made for practical reasons — these are groups where the parent entity is expected to have all the financial data to make such consolidation, and these rules are quite consistent across jurisdictions and provide a robust framework for determination of what a group is. Peterson provided the example of controlled investment entities of an investment fund — if such entities are not required to be consolidated, they are not part of the GloBE MNE Group. He stated that the deemed consolidation rules should not pull such entities into the Group, indicating that clarifying guidance on that outcome is expected to be released shortly.

On Covered Taxes, Peterson noted that the use of deferred taxes is somewhat revolutionary. He reminded the audience that this was not the initial preference of the OECD and that the October 2020 Blueprint on Pillar Two had contained a "carryforward" mechanism instead. However, given the push by the business community for the use of deferred tax accounting, the Model GloBE Rules include deferred tax concepts with modifications aimed at addressing policymakers' concerns about the use of these concepts, including what he described as perceptions regarding discretion given to the taxpayer on the recognition of deferred taxes and reluctance to go too far in providing credit for taxes that have not yet been paid and may never be paid. To address these concerns, the Model GloBE Rules remove valuation allowances and uncertain tax positions from the amount of Covered Taxes because management discretion is allowed on these items. In the same vein, a recapture rule (with exceptions) is included.

Peterson described the requirement to recast financial accounting deferred tax amounts at the 15% GloBE minimum rate as intended to provide credit for deferred taxes only insofar as there is a timing difference. This prevents excess deferred tax amounts to offset any permanent differences.

Peterson also discussed the work on preparing a standardized template for the GloBE information return, with exchange mechanisms between tax authorities, and the work on dispute resolution mechanisms to address overlapping imposition of GloBE taxes. He indicated that work has begun on safe harbors and simplification mechanisms, noting that countries that have started their legislative process with respect to implementation may want to include these mechanisms in such legislation. Finally, he stressed the importance of building capacity and the need to provide technical assistance to countries implementing the GloBE rules and/or a Domestic Minimum Tax.

Kreienbaum began by stating Germany's strong support for the Pillar Two project and alluded to the recent objection of Hungary to adopting the EU Directive on Pillar Two. He said that all EU Member States are members of the Inclusive Framework and that he believes the directive ultimately will be agreed to. However, if Hungary continues to object and unanimity doesn't exist among the 27 Member States, he also expressed confidence that most EU Member States will adopt Pillar Two, either through alternative EU mechanisms to adopt the directive or by moving forward without a directive, on their own. He discussed some of the details of the draft EU Directive on Pillar Two, highlighting some of the key differences with the OECD Model GloBE Rules such as the application of the IIR in a domestic context, which he noted did not change the rule ordering so that a foreign parent's IIR would still supersede such domestic IIR. The draft EU Directive also includes the option of introducing a Qualified Domestic Minimum Top-up Tax, and he indicated that Germany would adopt such a rule and that he expected all EU Member States would do the same.

Finally, Kreienbaum commented on the treatment of the US GILTI regime under the Pillar Two rules, indicating that the current regime would be considered to be a CFC regime and that the regime as it would be modified under the legislation that has been approved by the House of Representatives and is pending in the Senate would be considered to be a qualifying IIR. This affirmation that adopting the proposed legislative changes to GILTI would permit GILTI to be considered a qualifying IIR was reiterated by other government officials and members of the OECD Secretariat at the conference.

Kysar started with a brief history of consideration of minimum taxes in the US with the aim of illustrating broad bipartisan support for this concept. She expressed her confidence that enactment of the pending legislative modifications to the US GILTI regime is only weeks away. She reiterated that modifying the GILTI regime to reflect a country-by-country approach with a 15% rate would make the regime a qualifying IIR, referring to Article 51 of the draft EU Directive to substantiate this position. Similarly, she indicated that there could be no doubt that if the GILTI regime is not modified, it would be a CFC regime for GloBE purposes.

Wood focused on some technical issues under consideration, starting with tax credits and their treatment under the GloBE rules. He noted that certain direct pay credits that have been proposed in the US would be Qualified Refundable Tax Credits and further indicated that US tax credits that are recorded through the equity method (such as the low-income housing tax credit) should not trigger any issues for GloBE purposes. He nevertheless noted that additional work would be needed in some areas, such as clarification of whether a transferable tax credit would be equivalent to a refundable tax credit.

On the allocation of CFC taxes — which is an issue under the current US GILTI regime as well as the US subpart F rules and also under CFC regimes in other jurisdictions — Wood noted that various approaches are being considered, including:

  • A "tracing" approach, under which local rules would be used to determine whether income is attributable to a specific Constituent Entity. He described this approach as highly complex.
  • A "mechanical" approach, under which the total CFC liability would be reallocated using allocation keys based on data identified during the GloBE exercise.

He indicated that input from US MNEs on this topic would be welcome, adding a request for input on how US domestic losses should be accounted for under both approaches. Woods noted that developing a consensus approach for allocating CFC taxes will be technically difficult, but he also reminded the audience that this is not just a US problem to solve because other countries, including Japan, the UK, and EU Member States, also have CFC regimes and thus have a stake in ensuring these rules are developed.

Finally, on simplification mechanisms, Wood stressed how critical these would be, indicating that the US Treasury wanted meaningful simplification while not jeopardizing the integrity of the rules and noting that ideally any safe harbor mechanism would only apply where no top-up tax would have been due. If a safe harbor mechanism applies, then no GloBE calculation would be required. On this topic, he also indicated US support for transitional safe harbors, which he described as having two very important benefits — being available when most needed for both the tax administration and the taxpayer and being only temporary in nature.

A business representative highlighted the enormity of the task ahead for policymakers on development of the implementation framework. There will need to be infrastructure in place to address interpretive issues and conduct peer reviews throughout the life of these rules. The use of accounting standards as the base for the GloBE computation creates its own challenges and there are open questions about how to address the fact that different accounting standards could result in different outcomes under the GloBE rules. Finally, the need for dispute resolution mechanisms that has been a focus in the development of the Pillar One rules is a need with respect to Pillar Two as well and is exacerbated in situations where there is no applicable tax treaty.

Another business representative noted that divergence in the rules is to be expected when the pen shifts from policymakers to legislators, which will raise complex issues. In addition, a business representative highlighted the importance of tax policy on investment and expressed concern about the implications of the treatment under the Model GloBE Rules of R&D incentives, particularly the US R&D tax credit. This treatment could have the effect of stifling innovation, which would have significant negative consequences. Kysar responded by reiterating Grinberg's comment that the Biden Administration is committed to working with Congress to preserve the value of such tax incentives, she also said that the "vast majority of taxpayers" will not see a reduction in the value of the R&D tax incentive in part because many companies that claim the credit are not of a size that will make them subject to Pillar Two. However, the business representative disputed this assertion.

Peterson also defended the Model GloBE Rules' treatment of such tax incentives, noting that the Inclusive Framework debated the treatment of such incentives and that the divergent treatment of refundable and non-refundable tax credits was "by design."

Under the pillars — Dispute prevention and resolution

This first panel on tax certainty focused on dispute prevention and resolution with respect to Pillars One and Two. The panel was led by the OECD's Achim Pross and included both co-chairs of the OECD Task Force on the Digital Economy, Michael Plowgian of the US Treasury Department and Gaël Perraud of the French Ministry of Economy and Finance.

The discussion began with an introduction on the current tax controversy landscape by Pross and then focused on the work that has been done to date on dispute prevention and resolution with respect to Pillar One Amounts A and B and Pillar Two.

On Pillar One Amount A, the panel indicated that the OECD and the Inclusive Framework have worked on identifying the features of the existing tax controversy landscape that were considered more positive in order to incorporate them into the dispute resolution and prevention discussions for BEPS 2.0. The key features identified are the need for: (1) a multilateral early certainty process; (2) an enhanced cooperation systems approach; (3) a review process without separate audits; and (4) a mandatory binding outcome.

With these features idea in mind, the Inclusive Framework is working on a solution based on a series of reviews: (1) an advance certainty review on areas where investment in systems is needed; (2) a scope certainty review on whether an MNE Group is in scope; (3) a comprehensive certainty review on the Amount A calculation and reallocation; and (4) a determination panel to resolve disagreements on these reviews.

Based on the stakeholder comments that were submitted on the consultation document on tax certainty for Amount A, the panel highlighted the following elements that require further attention and work: (1) the need for broad scope for advance certainty; (2) advance certainty before the start of the relevant period; (3) narrow scope for the internal control framework review; (4) greater role for taxpayers in the process; (5) clear timeframes and strict deadlines to ensure a solution; and (6) importance of confidentiality of the information shared.

Other comments received on the consultation document included: the need for a broader scope, no limitations on access to the process, and access to dispute prevention and resolution where there is no bilateral tax treaty; the potential for a roll forward of the outcomes; and the inappropriateness of imposing charges on taxpayers for the process.

The business representatives identified key issues that need to be carefully addressed when designing the dispute prevention and resolution processes, noting that it is difficult at this point in the work to understand how much advance certainty will be available. The timing of the process, considering the amount of information to be requested and analyzed, was described as a major concern. In addition, panel composition and confidentiality of the information were raised as features that require further work, noting a general preference for panel members who are from tax administrations rather than independent experts. Other key elements highlighted were the importance of building mechanisms to strengthen the ability of taxpayers to provide input during the process and the importance of the lead tax administration in the coordination of the process. Additional concerns include the current lack of a clear process for reflecting the effect of audit adjustments on Amount A determinations, the need for a robust set of transitional rules and a "soft landing" relief mechanism, and the inclusion of materiality thresholds in order to limit the matters that will be analyzed by the determination panels.

On Pillar One Amount B, introductory remarks provided some background on the earlier OECD work on this topic. The 2013 Annex I to Chapter IV of the Transfer Pricing Guidelines included the development of a Sample of Memorandum of Understanding for low-risk distribution, manufacturing and R&D functions. In 2019, the Forum on Tax Administration's "Santiago communique" was released, which included agreement to explore the potential use and sharing of benchmarks for standard situations in the area of transfer pricing. Most recently, the October 2021 political agreement on key parameters of Pillars One and Two included agreement to simplify and streamline the application of the arm's-length principle to in-country baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries.

The panelists agreed that simplification is a key element of Amount B, in particular when there are no comparables available. Business representatives noted that they would want a broad scope for the Amount B solution, but Pross indicated that they need to be realistic and that it is important to reach an agreement as soon as possible on a scope that then can be further expanded subsequently. Panelists also stressed the importance of focusing on low-capacity countries. Another concern noted by a business representative during the discussion was the current absence of a mechanism to ensure consistent adherence to the new rules and the uncertainty regarding legal status of guidance from the OECD and the Inclusive Framework.

On Pillar Two, introductory remarks highlighted key process points made in the consultation on the implementation framework:

  • The need to develop a process to determine whether a rule is "qualified" through a central and transparent process ideally conducted at the level of the OECD/Inclusive Framework
  • Dispute prevention: the need for a coordinated approach for audits, ideally centralized at the level of the Ultimate Parent Entity /Designated Filing Entity jurisdiction and to consider developing an early certainty process, possibly inspired by Pillar One
  • Dispute resolution: the need for a timely and binding resolution process; the need for a Multilateral Convention; and potential for addressing disputes under existing processes

Panelists referred to these features as all being important elements. Perraud expressed the view that one key feature is tax certainty which is already embedded in the Model GloBE Rules because these rules should guarantee a coordinated approach around the world that should lead to less controversy. Business representatives indicated that a Multilateral Instrument is worth exploring, but given the difficulties expected to develop and ratify such instrument, the Inclusive Framework should explore other avenues based on the current dispute resolution and prevention solutions.

Beyond the pillars — Dispute prevention and resolution

This panel focused on the OECD's ongoing work on dispute prevention and resolution outside the context of Pillars One and Two. The panel was led by the OECD's Grace Perez-Navarro and also included John Hughes, Chair of the Forum on Tax Administration MAP Forum and Director of Field operations for the Large Business & International Division of the US Internal Revenue Service.

Perez-Navarro provided an update on the work of the FTA Mutual Agreement Procedure (MAP) Forum, focusing particularly on progress on the Action 14 peer reviews and the International Compliance Assurance Program (ICAP).

Hughes stressed the need for streamlining the Advance Pricing Agreement (APA) process and the need to develop a manual outlining best practices. The best practices manual would aim to promote coordination and synchronization of APA development in order to reduce time lags due to asymmetrical APA processes and to increase collaboration and transparency while ensuring that there are realistic expectations for competent authorities and taxpayers. He also discussed ideas around exploring multilateral MAPs and APAs and identification of possible challenges, constraints and options to choose from when involved in multilateral cases.

In terms of upcoming work in this field, Hughes highlighted the upcoming annual publication of the Action 14 MAP statistics in November 2022; a new project on a possible APA-like process for non-transfer pricing issues to be started next year; continued work on the use of standardized benchmarks beyond Amount B; and the work to update the Manual on Effective MAP (MEMAP).

Perez-Navarro provided an update of the ICAP program, indicating that the ICAP is not a replacement for a bilateral or multilateral APA, but may complement these instruments by providing a faster route to greater comfort over more transactions in multiple jurisdictions. Since 2021, ICAP is now a full FTA program with two periods for intake of MNE groups per year (March and September) and 22 tax administrations are currently participating. A business representative described positive experience with the ICAP program.

Finally, Perez-Navarro noted the OECD's Tax Co-operation for the 21st Century Report, prepared to inform G7 discussions in May 2022 on what the major developments in the international tax architecture may mean for the future of co-operation between governments in tax matters.


The discussion at the conference underscored the continuing political momentum with respect to both Pillars One and Two. Plans were announced for a July release of a detailed and comprehensive package of Pillar One rules in the form of a consolidated consultation document with the opportunity for stakeholders to submit comments. The OECD Secretariat and government officials made clear that the Model GloBE Rules and related Commentary that have been released on the Pillar Two global minimum tax provide countries with what they need to begin to implement these rules into their domestic tax laws. In addition, work is continuing on development of interpretative guidance and administrative processes to support this implementation.

Businesses should follow developments closely, both in the global discussions and in the implementation activity in the countries that are relevant to their footprint. Businesses also should consider taking the opportunity to provide input on areas of particular concern through the consultation processes in the OECD and at the country level. Given the significance of changes being developed, it is important to evaluate the potential impact of the new rules and assess what systems and process modifications may be needed in order to capture the data that will be required for compliance with such rules.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States)