In May 2019, the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) agreed a Programme of Work for Addressing the Tax Challenges of the Digitalisation of the Economy. The Programme of Work is divided into two pillars:
- Pillar One addresses the allocation of taxing rights between jurisdictions and considers various proposals for new profit allocation and nexus rules;
- Pillar Two (also referred to as the “GloBE” proposal) focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.
To make progress towards reaching a consensus solution to Pillar Two issues, the OECD Secretariat has prepared a public consultation document. This consultation document was discussed by the Working Party No. 11 at its meeting on 9-10 October 2019 and by the Steering Group of the Inclusive Framework and is now released to the public for comments.
This consultation document (available soon in French) focuses on specific technical issues in respect of the GloBE proposal where input from stakeholders would be valuable in progressing the work. For purposes of this consultation, comments are welcome on all aspects of the Programme of Work on Pillar Two, but requested specifically on three technical design aspects of the GloBE proposal:
- the use of financial accounts as a starting point for determining the tax base;
- the extent to which an MNE can combine income and taxes from different sources in determining the effective (blended) tax rate on such income; and
- stakeholders’ experience with, and views on, carve-outs and thresholds that may be considered as part of the GloBE proposal.
The comments provided will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020. Some of the technical and design aspects of the GloBE proposal depend on policy choices to be agreed within the context of the Inclusive Framework. For example, the mechanics and operation of the undertaxed payment rule and the nature and scope of the subject to tax rule need to be further developed by the Inclusive Framework for a clearer outline of these rules to emerge, which could then benefit from further public consultation at a future point in time.
This consultation document has been prepared by the Secretariat, and do not represent the consensus views of the Inclusive Framework, the Committee on Fiscal Affairs, or their subsidiary bodies.
Interested parties are invited to send their comments no later than Monday, 2 December 2019, 18:00 (CET), by e-mail to taxpublicconsultation@oecd.org in Word format (in order to facilitate their distribution to government officials). All comments should be addressed to the International Co-operation and Tax Administration Division, Centre for Tax Policy and Administration.
1. What are the challenges that are being addressed under the GloBE proposal?
Like Pillar One, the Global Anti-Base Erosion (GloBE) Proposal proposal under Pillar Two represents a substantial change to the international tax architecture. This Pillar seeks to comprehensively address remaining BEPS challenges by ensuring that the profits of internationally operating businesses are subject to a minimum rate of tax. A minimum tax rate on all income reduces the incentive for taxpayers to engage in profit shifting and establishes a floor for tax competition among jurisdictions. In doing so, the GloBE proposal is intended to address the remaining BEPS challenges linked to the digitalisation of the economy, but it goes even further and addresses these challenges more broadly. The GloBE proposal is expected to affect the behaviour of taxpayers and jurisdictions. It posits that global action is needed to stop a harmful race to the bottom on corporate taxes, which risks shifting the burden of taxes onto less mobile bases and may pose a particular risk for developing countries with small economies. Depending on its design, the GloBE proposal may shield developing countries from pressure to offer inefficient tax incentives. The GloBE proposal is based on the premise that, in the absence of a co-ordinated and multilateral solution, there is a risk of uncoordinated, unilateral action, both to attract more tax base and to protect existing tax base, with adverse consequences for all jurisdictions.
2. How does the GloBE Proposal seek to address these challenges?
Under Pillar Two of the Programme of Work, members of the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) agreed to explore, on a without prejudice basis, issues and design options in connection with the development of a co-ordinated set of rules:
- an income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate;
- an undertaxed payments rule that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;
- a switch-over rule to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum rate; and
- a subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.
These rules would be implemented by way of changes to domestic law and tax treaties and would incorporate a co-ordination or ordering rule to avoid the risk of double taxation that might otherwise arise where more than one jurisdiction sought to apply these rules to the same structure or arrangement.
3. What is the status of the work on the GloBE proposal?
Having recognised the challenges arising from the digitalisation of the economy, the G20 mandated the Inclusive Framework to deliver a solution by the end of 2020. TheProgramme of Work endorsed by the G20 Finance Ministers and Leaders in June 2019 serves as a plan for future work consisting of a two-pillar approach, aiming to provide new nexus and profit allocation rules under Pillar One and a global anti-base erosion mechanism under Pillar Two.
The Programme of Work for Pillar Two specifies that the GloBE proposal will operate as a top-up to an agreed fixed rate. The determination of the actual rate of tax to be applied under the GloBE proposal will be discussed once other key design elements of the GloBE proposal are fully developed.
The Programme of Work further sets out the key design issues that need to be addressed in the context of the GloBE proposal, including the determination of the tax base, the extent to which the rules will permit blending and questions as to the need for (and design of) carve-outs and thresholds. This public consultation document explores each of these three technical design aspects. The comments provided from stakeholders as part of the public consultation will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020.
The Programme of Work also directs the Inclusive Framework to consider issues around rule co-ordination as well as the interaction of the GloBE proposal with other international and domestic tax rules in order to ensure that the proposal avoids the risk of double taxation, minimises compliance and administration costs, and that the rules are targeted and proportionate. Progress has been made in relation to these issues, with Inclusive Framework members actively engaged and identifying design solutions to address these challenges.
Some of the technical and design aspects of the GloBE proposal depend on policy choices to be agreed within the context of the Inclusive Framework. For example, the mechanics and operation of the undertaxed payment rule and the nature and scope of the subject to tax rule need to be further developed by the Inclusive Framework for a clearer outline of these rules to emerge, which could then benefit from further public consultation at a future point in time.
For purposes of this consultation, comments are welcome on all aspects of the Programme of Work, but requested specifically on the three technical design aspects of the GloBE proposal included in this public consultation document.
4. Which businesses are in the scope of the GloBE proposal?
Recognising, as stated in the Action 1 Report, that it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes, the scope of the GloBE proposal is not limited to highly digitalised businesses. By focusing on the remaining BEPS challenges, it proposes a systematic solution designed to ensure that all internationally operating businesses pay a minimum level of tax. In so doing, it helps to address the remaining BEPS challenges linked to the digitalising economy, where the relative importance of intangible assets as profit drivers makes highly digitalised business often ideally placed to avail themselves of profit shifting planning structures.
The Programme of Work calls for the exploration of possible carve-outs as well as thresholds and exclusions to restrict application of the GloBE proposal. This consultation document requests input from stakeholders on their experience with, and views on, carve-outs and thresholds that may be considered as part of the GloBE proposal.
5. How inclusive is the decision-making process?
The Inclusive Framework has a global membership, including about 70{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of non-OECD and non-G20 countries from all geographic regions. The work in the Inclusive Framework is conducted on an equal footing, meaning that countries and jurisdictions, small and large, developed and developing, have an equal say in the ongoing work to address the tax challenges arising from the digitalisation of the economy. Furthermore, international organisations can act as Observers within the Inclusive Framework, and regional tax organisation such as the African Tax Administration Forum and the Inter-American Centre of Tax Administrations are also represented. Input from the business community and civil society is also actively solicited.
6. How can stakeholders provide their input on the consultation document released today?
Stakeholder input is actively encouraged. A public consultation meeting on Pillar Two has been scheduled for 9 December 2019 and any interested party is welcome to attend and submit comments. Stakeholder input will be critical as the details of this proposal are further developed. Please visit our calendar of planned stakeholder input in OECD tax matters for more information.
Related Documents
Source: OECD
