The OECD seeks consensus by the end of 2020 on how to ensure all profits of multinational groups are subject to a (yet to be determined) worldwide minimum level of taxation. The proposals, if implemented, would have a major impact on the way multinationals are taxed, and would lead them to rethink how they structure their operations and how they organise intragroup cash flows. Stakeholders now have an opportunity to help shape the proposals during a written consultation open until 2 December 2019.
A mix of potential measures affecting a broad range of taxpayers
The proposal forms part of the OECD's programme of work on the tax challenges of the digital economy:
- Pillar One seeks to reallocate taxing rights towards consumer jurisdictions (see our tax flash of 9 October 2019 regarding the proposal for a Unified Approach under Pillar One)
- Pillar Two aims at ensuring that profits are subject to a minimum level of tax on a worldwide basis (so-called "global anti-base erosion" or "GloBE" proposal).
Both pillars would in principle target taxpayers in general (subject to certain thresholds and carve-outs), without focusing on pure digital economy actors or on technology-driven business models.
The OECD explores a mix of measures in the context of Pillar Two:
- On outbound payments: countries could limit the deductibility of payments and/or impose withholding tax at source if these payments are subject to low or no tax at the level of the recipient;
- On inbound payments: switching from a tax exemption to a tax credit method for double taxation relief purposes; and
- CFC-type of rules: including insufficiently taxed income of foreign branches and controlled entities.
Some of these measures would have to be implemented by amending tax treaties (e.g., the switch-over clause); others could be directly implemented in domestic legislation.
Key challenges of the measures explored under Pillar Two include (i) enforcing effective mechanisms to prevent or resolve double/multiple taxation situations, (ii) the potential complexity of the rules, (iii) the costs associated with compliance (both for taxpayers and the tax authorities), and (iv) achieving at least an OECD-wide consensus.
Stakeholders are for now called upon to provide technical input by Monday 2 December 2019 on three generic aspects of Pillar Two:
- The determination of the tax base and account for timing differences between tax systems;
- The extent to which a 'blended' tax rate could be invoked (to see if a minimum level of taxation is already attained) when part of the income is highly taxed and the other part is subject to low or no taxation; and
- What kind of thresholds and carve-outs would be appropriate.
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