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June 28, 2024
2024-1276

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

  • Panelists speaking at the OECD's annual tax conference, held in Washington on 24-25 June, focused primarily on Pillars One and Two of the BEPS 2.0 project.
  • This Tax Alert highlights topics of interest discussed at the conference.
  • Businesses should follow BEPS 2.0 developments closely, both in the global discussions and in implementation activity in countries that are relevant to their footprint.
 

Executive summary

The Organisation for Economic Co-operation and Development (OECD) held its annual tax conference in Washington, DC, on 24-25 June 2024. 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 and globalization of the economy (the Base Erosion and Profit Shifting (BEPS) 2.0 project). In addition, there were sessions covering the OECD's work on global mobility of workers, tax administration and tax certainty.

Senior members of the OECD Secretariat participated in the conference, along with tax officials from several Inclusive Framework member countries who are responsible for their countries' participation in the tax work of the OECD, including officials from Argentina, Canada, Germany, Italy, Japan, the Netherlands, the United Kingdom and the United States. In addition, the conference featured keynote addresses by US Congressman Kevin Hern (R-OK), Gerassimos Thomas of the European Commission, Aviva Aron-Dine of the US Department of the Treasury and Peter Blessing of the US Internal Revenue Service.

Detailed discussion

Welcome and plenary

After Whitney Baird, President and CEO of the United States Council for International Business (USCIB), welcomed participants, Aviva Aron-Dine, Acting Assistant Secretary, Office of Tax Policy, US Treasury, spoke about the Biden Administration's views on the work of the OECD.

Aron-Dine began by stressing that the Biden Administration is mindful of the changing economic landscape since BEPS 1.0 with respect to economies moving from tangible to intangible value creation and the interconnectedness of the global economy. These changes necessitate additional effort to address artificial profit shifting and "the race to bottom," with consideration of the needs of workers, developing countries, as well as the United States' own interests, she said. She emphasized the need for global solutions and multilateralism to address these problems.

Aron-Dine further indicated that work at the OECD with respect to the two Pillars has garnered broad support that can provide stability and certainty for governments and taxpayers alike. The Biden Administration is strongly committed to US adoption of the Pillar Two rules and views the adoption of the Pillar Two rules as additive to the US fisc.

Aron-Dine stated that, as the United States considers the expiration of many US tax provisions, there is an opportunity to rethink the US tax rules and how to create incentives for US investment. She expressed the view that the focus should be tax rules that prioritize investments in workforce and capital more than managing tax. Moreover, by remaining engaged in the process, the United States will be able to provide guidance on how the rules operate to benefit US multinational enterprises (MNEs). She further indicated that the benefit of engagement can be seen in the OECD administrative guidance addressing the allocation of GILTI taxes, transferability of credits, and tax equity investments. One important area that continues to be the focus for US Treasury is a solution for the treatment of the US research and development (R&D) tax credit. Although consensus has not yet been reached, discussions remain productive.

On Pillar One, the Biden Administration continues to see the benefit of a multilateral solution that will create stability and certainty for US MNEs. Aron-Dine said that from a revenue perspective, Amount A should be neutral to the US fisc and, when coupled with the removal of digital services taxes (DSTs) and other unilateral measures, Amount A should create a win for US MNEs. The US Treasury is focused on closing gaps that remain on Amount B and believes it should remain linked with Amount A. She noted that an optional version of Amount B is understandable as an initial phased approach, but to achieve the promised tax certainty of Pillar One, it ultimately will need to apply broadly and without optionality. She emphasized that the United States is determined to stay at the negotiating table, that negotiators are very close to agreement, and that until the United States is satisfied it will not be "pencils down."

Aron-Dine reiterated that, for both Pillar One and Pillar Two, the Biden Administration acknowledges the important role of Congress to enact US tax rules that respond to or adopt Pillar Two and to approve the multilateral agreement on Pillar One.

In addition, she stated that other OECD efforts beyond Pillar One and Pillar Two also highlight the importance of multilateralism in creating stable and longstanding tax policy that put all jurisdictions on a level playing field. She noted mobile workforce issues and rationalizing other BEPS measures, in particular. She also highlighted that the United States hosted a Global Forum on Transparency and Exchange of Information for Tax Purposes meeting held on 13-14 June 2024.

Finally, Aron-Dine stressed the importance of the participation of developing countries in creating meaningful multilateral solutions, a point that was echoed by other government speakers and OECD officials throughout the conference.

Following Aron-Dine's presentation, the chair of the USCIB tax committee reiterated the need to find consensus on the treatment of US R&D credit. He also observed that the two-Pillar project is at a critical juncture with respect to achieving its stated purpose of creating stability and certainty, noting that issues remain open on Amount A and the link with Amount B. For Pillar Two, he stressed need for simplification and permanent safe harbors. He further noted that more and more taxpayers are reporting their cost of compliance will far exceed the tax to be paid under Pillar Two and highlighted the concerns regarding inconsistent application of the rules, which underscore the need for agreement on dispute resolution.

The international tax agenda

This panel was moderated by Manal Corwin, Director of the OECD Centre for Tax Policy and Administration (CTPA), and included tax officials from Argentina, Italy, the United Kingdom and the United States, as well as three business representatives.

Corwin began the discussion by describing the expanded participation of developing and developed countries in the international tax agenda as an indication of the importance of multilateralism to governments and economies of different sizes and with different priorities. She touted the progress the OECD has made over the years in achieving this result in various contexts, including implementation globally of several key BEPS 1.0 action items. She noted that the OECD helps build on multilateralism and understanding by all governments by designing rules that help close the tax information gap and build capacity for less developed countries.

Tim Power, Co-Chair of the OECD/G20 Inclusive Framework on BEPS, focused on the delay in reaching agreement on Pillar One, noting that the multilateral process that will produce stability also requires time to have interested parties — governments and business alike — participate in identifying issues and reaching solutions that have consensus. In particular, he noted the need to incorporate solutions for the feedback that business provided in the US public consultation on the multilateral convention (MLC) on Amount A, as well as with respect to the footnoted issues in the MLC text released in October 2023, the scope of Amount B, and the need for agreed dispute resolution mechanisms.

Scott Levine, Deputy Assistant Secretary (International Tax Affairs) for US Treasury, reiterated the Biden Administration's support for Pillars One and Two. From their perspective, Pillar One's value proposition is stability, certainty, a level playing field and ending the race to the bottom. In addition, they view Pillar Two as delivering a fairer system to workers and businesses while giving the United States revenue it needs to fund its priorities. For the United States, the primary deliverables for Pillar One are the removal of DSTs in response to Amount A and the mandatory application of Amount B. For Pillar Two, a solution for US R&D is key, and Levine reiterated Aron-Dine's statement that negotiations within the Inclusive Framework are making progress on this issue, although he said he was not at liberty as yet to share details.

Carlos Eduardo Protto, Director of International Tax Relations for Argentina's Ministry of Treasury, has been engaged in Inclusive Framework discussions from the outset of Pillar Two. Noting the complexities of creating a new system, he said there remains hope that as countries implement and administer the Pillar Two rules simplification will be easier to achieve and the stability of the system will be improved. As lessons are learned from others' implementations, he noted that Argentina will have a better understanding of how to implement Pillar Two.

Marco luvinale, Director of European and International Tax Affairs for the Italian Ministry of Economy and Finance, noted Italy's own implementation of the Pillar Two rules and other tax reform changes to their incentives to make them compatible with Pillar Two. As countries administer their Pillar Two rules, monitoring for consistency will be a challenge that can be addressed through Working Party 11 continuing to issue guidance, the ongoing peer review, and dispute resolution mechanisms. He further commented that, in each effort, there is opportunity for MNEs to engage with tax administrators to create workable rules.

The business representatives expressed support for continuing engagement with tax administrators to improve the administration of the Pillar Two rules. They noted the complexity of the rules felt by business now will become an issue for tax administrations as they try to audit and assess compliance with the rules. There are increasing concerns that inconsistent implementation by countries over time will create double tax without a solution on how to relieve that double tax. The panel highlighted the need for MNEs and tax administrators to work together to understand the issues and create consensus-based solutions.

Going forward with Pillar Two engendered a discussion about administration of the rules — the pace of guidance, formalizing business input and increased focus on capacity building. The business representatives commented that the current process, using a so-called business advisory group, for seeking input on the Pillar Two guidance process is not ideal and urged the adoption of a more formalized system for business input with increased transparency.

The panel also discussed issues outside of Pillars One and Two. Levine highlighted capacity building (mentioned by Protto too), transparency, and exchange of information that protects taxpayer confidentiality. Business representatives also pointed to the more traditional work of the OECD, including the development and maintenance of the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines as well as the efforts on improving MAP, developing ICAP and issuing best practice guidance on advance pricing agreements (APAs). Both the business and government representatives mentioned the need to consider how to "declutter" existing international tax rules as Pillar Two is implemented and administered over time.

Fostering growth and adapting to a changing environment (global mobility, CIT simplification, tax administration 3.0)

This panel, which focused on potential areas for tax work beyond Pillars One and Two, was moderated by the OECD CTPA Director Manal Corwin and included Achim Pross, Deputy Director of the OECD CTPA, tax officials from the Netherlands and the United Kingdom and two business representatives.

In her opening comments, Corwin stressed the tax policy objectives of growth and stability. She noted that work on additional permanent safe harbors for Pillar Two is a priority in terms of reducing resource costs for both taxpayers and tax administrations. She also said it will be important to signal an end of the BEPS projects so that the Inclusive Framework can move on to other tax areas that would benefit from global discussion. In this regard, she cited global mobility issues and climate taxes in particular and tax policies for shared growth more generally. She highlighted the importance of considering the needs of developing countries, noting the value of the work on digitalization of tax administration.

Corwin also commented on the experience with stakeholder engagement during the BEPS projects, saying it would be preferrable to have more opportunities for consultation with business both upfront and on an ongoing basis. Looking forward, she expressed interest in ensuring a more foundational, less ad hoc process for public engagement.

Focusing on the role of tax policies that promote economic growth, Mike Williams, Director of Corporate Tax for the UK's HM Treasury, expressed concern that the international tax community is not good at explaining to the average person on the street why elimination of double taxation is critically important. He stressed that it needs to be understood as being an essential part of the global tax landscape, not simply something that might be nice to have for countries that can afford it.

On the potential for "decluttering" the corporate income tax system by eliminating rules that are no longer needed in a post-Pillars world, Mickie Schoch, Director of General Fiscal Policy for the Dutch Ministry of Finance, cautioned that changing the existing system can be more difficult than thinking about new things. However, she agreed that this work is important and indicated that consideration should be given to the potential benefits to tax administrations as well as to businesses.

With respect to global mobility, Pross indicated that statistics show the massive potential for remote work, including across borders. He said that the OECD's upcoming work in this area will focus first on situations of intermittent presence in a jurisdiction, including the implications for corporate tax liability. He further noted that other areas to be addressed include questions of residence, treatment of cross-border activity and pension and other employee benefit issues. Williams noted that these efforts will need to take into account differences in jurisdictions' approaches to health care and other benefit programs. Schoch noted that the Netherlands has significant experience with bilateral agreements in this area, but that more could be done through discussions in the European Union and the OECD. The business representatives indicated that global mobility issues are not limited to the elite but have implications much more broadly, noting the importance of recognizing the modern realities including growing demands from employees for flexibility in where they work.

Keynote address — Peter Blessing

Peter Blessing, Associate Chief Counsel (International) at the US Internal Revenue Service (IRS), provided remarks on a wide variety of ongoing IRS guidance projects, such as regulations related to digital transactions including cloud services; dual consolidated losses (DCL); foreign tax credits (FTC); previously taxed earnings and profits (PTEP); foreign currency regulations; and a few other items.

Proposed regulations on digital transactions regulations were issued in 2019 and received numerous comments. Blessing said that another iteration of these regulations would be issued this year. The scope has expanded and will address, among other topics, the sourcing of cloud services income.

The IRS released a Notice in late 2023 requesting comments on the treatment of the Pillar Two regime for purposes of the DCL regulations. It has received many comments suggesting that the Pillar Two rules should not trigger the application of the DCL regulations because Pillar Two functions more like an alternative minimum tax than the classic corporate income tax regimes for which the DCL rules were designed, and for other reasons. Blessing, however, indicated that the IRS believes that Pillar Two, in some circumstances, presents the double deduction issues that the DCL rules were intended to address. In a couple of highly technical comments, he also indicated that the IRS (i) is considering revisiting when it is appropriate to take into account certain income inclusions (likely global intangible low-taxed income (GILTI) or subpart F income) and (ii) does not believe that the "duplicate loss arrangement" rules in the Pillar Two Administrative Guidance from December 2023 are "mirror legislation."

Final foreign tax credit regulations were issued at the end of 2021 but then suspended in 2023. Blessing noted that the IRS continues to consider the issues raised by those regulations and comments received, but also said that the suspension of the final regulations was "evergreen" and did not expire. He did not provide a timeline for the release of new regulations in this area.

PTEP regulations took on heightened importance in 2017 after the enactment of the GILTI regime. In late 2018, the IRS released a Notice that provided several updates to the PTEP rules and indicated that proposed regulations would be forthcoming. Blessing noted that the first tranche of these regulations is in the "home stretch." This tranche would address certain basic, mechanical rules as well as some of the issues presented when controlled foreign corporations are owned by partnerships. A second tranche, to be released later, would address topics like nonrecognition transactions.

Proposed foreign currency regulations under Internal Revenue Code (IRC) Section 987 were released at the end of 2023. Blessing indicated that the IRS is working through comments but expects to release final regulations this year.

He also mentioned several other guidance projects. Final regulations addressing the repatriation of intangible property under IRC Section 367(d) should be released later this year, with virtually no changes compared with the proposed regulations issued in 2023. Proposed regulations on the capitalization of research or experimentation expenditures under IRC Section 174 should be released this year and will include a small "reg-let" addressing certain international issues.

Lastly, Blessing indicated that the IRS Office of Associate Chief Counsel International is committed to reinvigorating the private letter ruling process.

The European Commission and international tax policy — Gerassimos Thomas

The Director General of the European Commission's Directorate-General for Taxation and Customs Union, Gerassimos Thomas, gave a short presentation on the need for continued cooperation among countries with respect to the OECD two-Pillar project. Emphasizing that international tax cooperation is necessary so that each country may operate and administer their own tax rules, Thomas shared examples of the work of the European Commission in relation to cooperation, including the work on harmful tax competition, exchange of information, and simplifying value added tax (VAT) compliance across EU Member States. Thomas noted that the OECD project is at a critical juncture and asked whether countries would continue to cooperate and finalize the two-Pillar plan that had achieved political agreement in 2021 or face disparate national initiatives. Thomas called for all countries within the Inclusive Framework to work together and stressed the importance of US support to finalize and implement the two-Pillar project.

Developments in addressing tax challenges to the digital economy — Amount A

This panel was moderated by Jesse Eggert, Senior Advisor to the OECD CTPA and primary drafter of the Amount A MLC and included tax officials from Argentina and the United States, as well as an academic representative and two business representatives.

Eggert began the discussion with his perspective on the MLC process, which is reaching its final stages and will soon be open for signatures. He called the three-year process a "slog," but noted the inherent difficulty in getting 147 countries to ultimately agree to such a fundamental measure reallocating taxing rights while also avoiding double taxation. The Inclusive Framework countries ultimately decided to avoid taking a too simple approach that would leave out key details. Instead, said Eggert, they produced a long and detailed document that nevertheless has generated significant agreement among the Inclusive Framework countries.

Scott Levine of US Treasury pronounced the Inclusive Framework discussions as productive, while noting some of the critical issues for the United States. According to Levine, there must be "a fair and workable definition of DST, and the Amount A outcome must link to the acceptance of a mandatory Amount B." He believes that the Inclusive Framework will work hard to find a deal that is consistent with the US "red lines."

Carlos Eduardo Protto of Argentina's Ministry of Treasury generally agreed with Levine but said that he had a slightly different angle. He noted that Amount A is not a small change — it introduces new nexus and new allocation rules to allow the system to coexist with the new challenges, including scale without mass. He stated that "we can no longer rely on standards that are 150 years old." In his view, this explains the proliferation of DSTs. He concluded by stating that he is optimistic about the prognosis of a truly workable Amount A and elimination of unilateral measures.

Lily Faulhaber of Georgetown University Law Center noted that there have been and will continue to be significant criticism of Amount A, but questioned what the international tax system would look like without Amount A. She said that countries would unilaterally adopt something like Amount A, in addition to the current and no doubt future DSTs. In addition, the UN could step to the forefront to take up the mantle of reallocating taxing rights.

One business representative noted the evolution of this project from its initial purpose of addressing the digital economy into a broader measure targeting large and profitable multinationals, whether digital or not. He expressed the view that "Amount A will do nothing if it doesn't remove DSTs." Another business representative noted that, although supportive of the overall objectives, the current MLC has some very significant problems in the areas of revenue sourcing, the marketing and distribution safe harbor, the "haircuts" on the otherwise helpful withholding tax adjustments, and administrative matters. In addition, he sees the Joint Tax Committee estimate of a US$1b revenue loss to the US fisc as having a chilling effect on the potential for US adoption of Amount A.

Transfer pricing, with focus on Amount B

This panel focused on the latest developments with respect to Amount B of Pillar One, which is intended to simplify and reduce disputes on the transfer pricing of baseline marketing and distribution activities. It was moderated by Achim Pross of the OECD CTPA and included tax officials from the United Kingdom and the United States as well three business representatives.

Pross began the discussion by noting that, within the Inclusive Framework, there are very different views with respect to Amount B and that the holders of particular perspectives do not break down into any usual camps. He noted that coming to agreement on Amount B is difficult because it attempts to change a "living system" rather than starting from scratch.

Tim Power, who is Co-Chair of the OECD G20 Inclusive Framework on BEPS, discussed the progress on the Amount B project. Phase 1, which effectively concluded with the June document, introduced elective treatment for Amount B. This has been incorporated into the Transfer Pricing Guidelines. It also resulted in a commitment by a number of "qualifying jurisdictions" (primarily comprised of low-capacity jurisdictions) to apply Amount B, as well as a commitment by the other Inclusive Framework jurisdictions to fully respect the outcome. The objective of Phase 2 will be to make Amount B mandatory.

Chris Bello of the US Treasury Department said that if the United States were tasked with drafting an Amount B plan, it would be easy to do so. It would also likely be easy for other countries to individually draft an Amount B plan. The problem is that the respective "Amount Bs" would likely be very different.

Bello stated that the United States foresaw two potential problems with the project. First, some OECD member countries think that it is simply not possible to have Amount B while simultaneously being consistent with the arm's-length principal. He stated that this could potentially be surmountable, by stressing the guidance that is already in the OECD Transfer Pricing Guidelines that there is a tradeoff between administrability and reliability that countries should evaluate in deciding on strict departures from transactional arm's-length outcomes. The US's second concern involved the pricing mechanism itself. Although the vast majority agree on how the pricing mechanism should work and agree on what the range should be, there is a handful of countries that do not agree and believe that, in light of specific (but unspecified) facts in their countries, Amount B simply does not reflect an arm's-length result. Bello noted that these positions have been taken without any empirical support. Reaching agreement has been difficult, which is why they ultimately took a two-phase approach.

Business representatives stated that they think that the objectives of Amount B — simplified and streamlined transfer pricing - are indeed worthy but that those objectives are not yet achieved. This has resulted in a fragmented landscape in which there are potentially hundreds of different possible outcomes, depending on whether and how countries decide to adopt Amount B, whether there is an applicable treaty, and how each jurisdiction defines its cap and collar amounts. They also stressed the need for jurisdictions to have the proper attitude in applying Amount B, and to be willing to accept that results might occasionally be higher or lower than the results under the status quo. The business representatives suggested that they should view this as an acceptable trade-off to achieve the objective of a simplified and streamlined system. Without this attitude, Amount B is not likely to succeed.

Tax certainty outside the Pillars

This panel, which focused on the latest developments in tax certainty practices, was moderated by Sandra Knaepen, Acting Head of the Tax Administration and VAT Division of the OECD CTPA, and included tax officials from Argentina, Japan and the United States as well as three business representatives.

Knaepen began the discussion by noting some new tax certainty tools, including the availability of information on the outcomes of ICAP, a new assessment methodology for Mutual Agreement Procedure (MAP) practices in Inclusive Framework member jurisdictions, and the ongoing work on updating the Manual on Effective MAP which includes gathering information from tax administrations and businesses on their experiences and recommendations.

Nicole Welch, Director of Treaty and Transfer Pricing Operations for the US IRS, expressed interest in whether businesses look at the published MAP statistics in determining how best to use the tax certainty tools; the business representatives indicated that the statistics are extremely helpful, but noted that more information on how to interpret the statistics would be useful, including more information on taxpayer withdrawals from MAP. Koki Harada, of the Japanese Ministry of Finance, noted that Japan has a long history with APAs and MAP and sees merit in participation in ICAP going forward.

In response to a question from Knaepen about why taxpayers may opt not to use dispute prevention tools, the business representatives identified timing issues, resource cost issues, procedural requirements and systemic problems as reasons for choosing not to deploy these tools in some cases. Carlos Eduardo Protto, of Argentina's Ministry of Finance, noted that low-capacity jurisdictions face resource constraints in deploying dispute prevention mechanisms.

With respect to areas for improvement in tax certainty, Welch also noted that a robust Amount B under Pilar One would allow Competent Authorities to devote their resources to other matters. Protto stressed that for areas where there are fundamental disagreements across jurisdictions, tax policy changes may be needed, but indicated that progress can be made in using the tools to address misunderstandings regarding the facts.

Welch also noted that where the rules are not clear, additional guidance or a Competent Authority arrangement can be useful, a point which drew agreement from the business representatives. Additional suggestions included the potential benefit of greater transparency on MAP outcomes in identifying recurring areas of disagreement, the possibility of moving ICAP more in the direction of APAs in terms of the level of comfort provided and the value of providing more examples in the OECD Transfer Pricing Guidelines and the Commentary to the OECD Model Tax Convention.

In closing comments, Knaepen described the value of arbitration in pushing Competent Authorities to reach agreement. A business representative agreed but noted the current limited availability of arbitration as a tool. Protto noted the sensitivities of some jurisdictions around arbitration and said that progress can be made through Working Party discussions, education and trust-building on the use of APAs. Harada stressed the importance of capacity building for developing countries.

Day 2 Welcome and keynote — US Congressman Kevin Hern

USCIB's Rick Minor introduced the keynote speaker Congressman Kevin Hern, who is a member of the US House of Representatives Committee on Ways and Means and leads the Committee's new tax reform tax team focused on global competitiveness. Minor noted that the Congressman's leadership and business acumen are a good fit to start the second and final day of the conference.

Congressman Hern, whose tax team is focused on international tax issues that may be addressed in legislation next year, began by sharing his experience of growing up in poverty and reaching heights of success as a franchise-owner of several McDonald's restaurants, where he learned about business and was also involved in tax policy for the organization. That experience and success, he noted, is key to his vision of a tax code (and a desire for international tax rules) allowing businesses to thrive and create investment and jobs for American workers in the United States. The global competitiveness tax team that he leads is focused on revisiting the 2017 Tax Cuts and Jobs Act (TCJA) to create pro-growth policies that make companies want to do business in the United States. He acknowledged that the TCJA sought to transition the United States away from a worldwide system of tax, but certain provisions continue to make the system a tax on worldwide income.

He was quite clear with respect to the OECD's two-Pillar project that US Treasury cannot go it alone without Congress, a view that he has stated publicly in the past. Moreover, he wanted all stakeholders in the OECD to understand the key role of Congress in enacting tax policy and protecting the US fisc, which he views as the fiduciary duty of the Congress. Congressman Hern quoted from a letter he and other Republican Ways and Means Committee members penned to US Treasury Secretary Yellen dated 19 January 2022: "it is a fool's errand for the Administration to engage in the OECD digitalization tax agreement negotiations without substantive bipartisan input from tax-writing committees in the House and Senate. A go-it-alone approach that fails to fully comply with the Constitution's demands will not produce a durable result at the OECD." He questioned the fairness of the two-Pillar project to US MNEs and whether the project has produced a government-subsidy race that does not result in a better playing field. He added that he wants to make sure that the current Administration, future administrations and the OECD understand the consequences of ignoring Congress when they are creating tax policies.

He summed up his address with a remark about the importance of small businesses, noting that every large business started as a small business, and stressed that the policies that US Congress enacts should work to allow businesses to compete and win so that all Americans have the opportunity to achieve the American Dream.

Pillar Two: Implementation of the global minimum tax, including Administrative Guidance

This panel was moderated by Achim Pross of the OECD CTPA and included John Peterson, Acting Head of the Cross Border and International Tax Division of the OECD CTPA, tax officials from Canada, Germany and Japan, and two business representatives.

Pross began the discussion by indicating that introduction of safe harbors requires a balance of simplification and protecting the integrity of the global anti-base-erosion (GloBE) rules to achieve the intended long-term impact of these rules.

Peterson stated that the latest Administrative Guidance has received a welcome response, describing it as clarifying a panoply of issues stemming from the practical application of the GloBE rules. He elaborated that the Guidance (i) covers the interaction of the GloBE rules on cross-border allocation of taxes with the intricacies of diverse international tax systems prevalent globally (e.g., cross-crediting and basketing), including their post-GloBE features such as the implementation of qualified refundable tax credits (QRTCs) and the overlay of deferred taxes, (ii) clarifies the approach for allocating the income and taxes of tax-transparent entities, which originally focused on direct owners, to ensure sensible and stable outcomes, (iii) introduces a simplified tracking mechanism for the deferred tax liabilities (DTLs) recapture rule, (iv) addresses the divergences between GloBE and accounting carrying values, and (v) preserves the neutrality of securitization vehicles.

Peterson noted that the Administrative Guidance plays an important role in achieving certainty and consistency. He also acknowledged that as the technical questions on the application of the GloBE rules continue to grow exponentially, some thought needs to be given to the appropriate focus for the issues to be addressed. Regarding future guidance, he stressed that there is a focus on and perceived value in developing robust, simplified permanent safe harbors that would reduce the importance of some of these technical questions (e.g., the allocation of controlled foreign company taxes).

Trever McGowan, Associate Assistant Deputy Minister of Finance Canada, indicated that has Canada enacted the GloBE rules including the first three sets of Administrative Guidance for implementation of the income inclusion rule (IIR) and the qualified domestic minimum top-up tax (QDMTT), with the legislation on the undertaxed payments rule (UTPR) to be released in due course. He explained that Canada preferred to legislate the GloBE rules (as opposed to a static reference to the GloBE rules) to be able to accommodate Canadian idiosyncrasies while achieving consistent outcomes. McGowan stated that Canada will continue to legislate new OECD guidance but noted that the legislation also incorporates a general interpretation rule that is ambulatory in nature and intended for interpretive questions that would not require amendments to the legislation for future guidance.

Alexander Hoeck, Tax Counselor for the Embassy of Germany in Washington, DC, briefly discussed the implementation and compliance status in Germany to underscore that Germany is in full compliance with the GloBE rules. Hoeck indicated that Germany opted for a separate law and introduced simplifications to minimize the administrative burden for MNEs and the tax administration. Considering the federal system in Germany and the primary responsibility of federal states for tax administration, he explained that Germany has implemented an exchange of information mechanism between federal and state levels and that coordination between these governments was necessary throughout the implementation process. For outstanding open questions, he stated that Germany does not intend to issue a comprehensive circular but remains committed to providing clarity quickly when needed. Hoeck conveyed that implementation of the Administrative Guidance requires legislative amendments, and work on the Guidance published in December 2023 is ongoing. However, for the latest Guidance, he noted that Germany is considering implementation at an administrative level. Nevertheless, Hoeck assured that Germany aims to implement quickly, by law or circular, to provide certainty and avoid any challenges related to retroactivity. Finally, he emphasized that the issuance of administrative guidance by the OECD is helpful for certainty to both taxpayers and implementing jurisdictions.

Koki Harada of the Japanese Ministry of Finance shared that Japan has implemented the IIR and intends to implement the QDMTT and UTPR later. He highlighted that the common approach inherently has both advantages and challenges, including the harmonization of the GloBE rules with existing domestic legislation and coordinated implementation. Harada indicated that Japan is actively working to navigate the harmonization of the QDMTT and UTPR with existing domestic legislation. He explained that tax certainty in coordinated implementation would be difficult to obtain without a multilateral instrument, with Japan keen to explore this option. Finally, Harada shared that further Administrative Guidance is necessary in three areas: (i) permanent safe harbors, (ii) open issues for cross-border allocation of deferred taxes, and (iii) adjustments for material competitive distortions and permanent differences.

Pross invited thoughts from the government panelists on potential manipulations associated with the simplifications introduced by safe harbors that may undermine the integrity of the GloBE rules. McGowan reiterated the appeal of safe harbors, but acknowledged the challenges associated with their development due to competing priorities and the need to achieve the right outcome. Hoeck recognized the significance of a permanent safe harbor but emphasized the need for reliability of data to ensure that the issues encountered with the transitional country-by-country reporting safe harbor are not perpetuated.

Global minimum tax: Rule coordination, compliance approaches, dispute prevention and resolution

This panel was moderated by Marco Iuvinale of the Italian Ministry of Economy and Finance and included the OECD's John Peterson, tax officials from the Netherlands and the United States and three business representatives.

Peterson began the discussion by indicating that the OECD is actively developing mechanisms to ensure coherent and consistent outcomes of the GloBE rules. He highlighted that determining the qualified status of local country legislation through the peer review process is significant for the efficacy of the embedded rule order in the GloBE rules (governing the allocation of taxing rights).

On the peer review process, Peterson provided an overview of the Q&A document published on 17 June 2024, noting that in the next few months implementing jurisdictions will complete a self-certification questionnaire to explain their basis for obtaining transitional qualified status. He continued that the transitional qualification mechanism will be followed by a robust, full legislative review, which will be accelerated for jurisdictions that presented concerns during the self-certification process, and an ongoing monitoring process. He also explained that there is a possibility of losing qualified status prospectively. In addition, he stated that the full legislative review will focus on QRTCs, which are becoming increasingly popular post-GloBE, and other benefits that are provided by implementing jurisdictions.

Regarding compliance, Peterson emphasized the importance of the standardized GloBE information return to reduce the compliance burden of MNEs and indicated that the development of an exchange framework is also underway. A business representative stressed the challenges encountered by MNEs due to inconsistent implementation timelines of the domestic legislation that result in financial statement volatility. She also explained that MNEs are undergoing significant financial accounting transformations to design operational systems for GloBE information return compliance; however, she noted that the process is currently largely manual, which means that local registration requirements are burdensome (citing Belgium as an example). She also indicated that it would be helpful if MNEs could engage with the OECD as topics are under development in the Administrative Guidance.

Kami Nelan, Associate International Tax Counsel in the Office of Tax Policy of the US Treasury Department, explained that the dissemination approach for GloBE information returns addresses two crucial concerns of MNEs on confidentiality of information and minimizing local filing burdens. She elaborated that this is achieved by precluding unnecessary disclosure of computational information to jurisdictions that do not have taxing rights per the agreed rule order and limiting the information to be furnished in local filing to the information that would have been received through dissemination. Nelan explained that the Inclusive Framework is also currently designing bilateral and multilateral competent authority agreements which will incorporate details on the timing of exchange, transmission, frequency and other technical aspects.

Peterson acknowledged that although the rule order is expected to limit differences in views, there is a need to be able to address challenges through dispute resolution. However, in response to a question from a business representative, he indicated that it would be difficult to consider the overlay of non-GloBE taxes. He stated that the peer review process would ultimately incorporate the UTPR, to consider the issues relating to the capacity of implementing jurisdictions to impose the UTPR and to manage disputes relating to different views on the computation of the allocable share of the UTPR of each jurisdiction.

Mickie Schoch of the Dutch Ministry of Finance conveyed that the Netherlands is taking steps to ensure tax certainty by publishing rulings and remains committed to dispute resolution while noting a preference for a multilateral mechanism. Peterson expressed that published rulings are a great mechanism to deliver certainty and their consistency with the intended outcomes can be subject to peer review. He encouragingly shared that there are tremendous opportunities for synergy and collaboration, including on the development of risk assessment tools. Marco Iuvinale of the Italian Ministry of Economy and Finance indicated a preference for reliance on MAP to resolve divergent interpretations.

Closing remarks

Acknowledging the conjecture and headlines surrounding the OECD two-Pillar project, OECD CTPA Director Manal Corwin, Director closed the conference with some general observations. Corwin said it is clear that there is consensus on fostering certainty and stability and to secure and realize those benefits there must be cooperation and collaboration. Corwin noted that engagement with the business community was invaluable to the process. Regarding the work on Pillar One, Corwin noted that there are 147 countries at the table participating in it, a sign that progress is being made.

Implications

The discussion at the conference underscored the strong political commitment to both Pillars One and Two. It also reinforced that there continue to be divergent views among Inclusive Framework jurisdictions on aspects of both Pillars.

The OECD Secretariat and government officials also foreshadowed some focus areas for future global tax policy work, including considering ways to declutter the international tax rules in a post-Pillar Two environment, addressing tax issues that arise with the increase in the global mobility of workers and continuing to improve tax certainty mechanisms.

Businesses should follow developments closely, both in the global discussions and in implementation activity in countries that are relevant to their footprint. Businesses also should consider taking the opportunity to provide practical input on areas of particular concern through the consultation processes in the OECD and at the country level.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young LLP (United States)

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor