The OECD have published a series of draft proposals which call for the impossible almost. A motion that has been snickered at since the finance world can remember: a global minimum business-tax rate, with the intention to prevent multinationals.
The proposal gives particular emphasis to the digital economy and how they may start to encroach their profits into low-tax jurisdictions.
The Pillar-2 Proposal
The so-called Pillar Two proposal is part of the OECD’s base erosion and profit shifting (BEPS) initiative. In theory, it gives third countries extra rights to tax a multinational corporation’s foreign branch or controlled entity, if the company’s jurisdiction of primary residence does not tax business profits (or income) at the minimum level.
This income inclusion rule would be backed up with an undertaxed payment rule to deny a deduction or impose source-based taxation, such as a withholding tax, on payments to a related entity that may not be subject to taxation at the minimum rate.
The Switch-Over Rule
A switch-over rule of law would also be introduced into tax treaties to permit a residence jurisdiction to switch from an exemption to a credit method, if the profits attributable to a permanent establishment, or derived from immovable property outside it, are subject to an effective rate below the minimum rate. A further rule would subject a payment to withholding or other taxes at source, or remove its eligibility for treaty tax relief.
The draft proposal has emerged from a collaboration of more than 130 countries, the Inclusive Framework on BEPS, formed in January 2019 to develop ideas on a without-prejudice basis.
Accordingly, it does not represent a consensus view of these countries, but only a first draft to invite feedback. The level at which the minimum tax rate will be set is to be discussed by the participating countries once the proposal’s other key elements are fully developed.
Comments are requested from countries by December 2nd. The OECD have welcomed views on three fundamental aspects of the plan:
The use of financial accounts as a starting point for determining the tax base.
The extent to which a multinational enterprise can combine income and taxes from different sources in determining the effective (blended) tax rate on such income.
Key stakeholders’ views on any carve-outs and thresholds that might be considered as part of the proposal.
Draft proposals for the first pillar of the BEPS programme, addressing the allocation of taxing rights between jurisdictions, and new profit allocation and nexus rules, were published in early October. The consultation on the document ended earlier last week, with decisions likely to be released sometime early next year.
In theory, the OECD are constantly improving their approach using feedback from relevant parties, so what’s to say it wont work this time, we’re looking at you US!