International taxation: two-pillar plan and the OECD mainstream

On February 21, OECD Tax Policy Director Pascal Saint-Amans and five other OECD tax policy chiefs hosted a virtual “OECD Tax Talks” webinar to assess the world’s progress in implementing the historic OECD/G20 two-pillar international tax package. There was much discussion about where the plan started and where it is going.

Even though the year 2022 has barely begun, there has been a lot of movement on this front as countries grapple with how and when to implement the ambitious proposed changes.

Pillar One and Pillar Two: where we are

Let’s start with a general update on Pillar Two. After the release of the model rules—which concern the implementation within national law of the articulated basis of the Global Anit-base Erosion rules (GloBE)—the OECD stated that it is working on developing a commentary, expected to be released in March.

Around the world, jurisdictions are taking first steps toward the introduction of a global minimum tax. The UK, for example, opened a public consultation on introducing Pillar 2 in the domestic framework. At the end of 2021, the European Union proposed a directive aiming to introduce the GloBE through a harmonized tool among its member states. Public consultation in this regard is pending. The fixed deadline is next April.

In January, Switzerland also announced its intention to adhere to Pillar 2 through a constitutional amendment. Such an intervention will assure compliance with the OECD timelines and grant tax certainty for both MNEs and tax authorities.

The G20 finance ministers and Central Bank governors’ communique of February 17-18 states:

To ensure the swift global implementation of the historic OECD/G20 two-pillar international tax package agreed in 2001, we commit to develop the model rules and multilateral instruments according to the timetable provided in the Detailed implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2021.

Aware of the important role such a measure plays, the G20 finance ministers also recommended paying particular attention to developing countries, identifying those areas where domestic resource mobilization efforts could be further supported.

Meanwhile, the OECD is focusing on implementation. Public consultation on the subject-to-tax-rule (STTR) and the multilateral instrument to introduce GloBE’s basics will be held soon.

As for Pillar One, it is running a bit behind, but work is in progress. The OECD has opened two public consultations on Amount A at this point under Pillar One. Another one concerning Amount B will be released soon.

Tax certainty is at the heart of determining how Pillar One should be implemented. The proposal rewrites global taxation as we know it, basing taxation on where consumers are located as opposed to a taxpayer’s physical presence.

Deadlines are tight and the OECD is doing its best to respect them, without losing sight of stakeholders’ standings.

Among the main issues, there is the elimination of double taxation, the marketing and distribution of profits regarding safe harbour concepts, and withholding taxes. But even administration issues and segmentation must not be forgotten.

The whole structure aims to prevent the adoption of—or the failing of already enforced— unilateral measures. Pillar One’s goals may be reached only through cooperation.

A particularly irksome point is revenue sourcing within Amount A. Experts are not sure about the direction to follow here. It is important to balance accuracy and compliance costs. Indeed, the “finished good rule” designs the principle of revenue sourcing rules, but it is not easy to address because of its strong relationship with the final market.

Thanks to stakeholders’ inputs, it has been possible to rule out some ideas inapplicable in practice. Actually, the intention is to “use what they have to sensibly approximate,” reflecting on information collected, its relevance, and accuracy. It is important to understand the role of data already available to tax authorities and how they can help to define the market jurisdiction.

On February 18, the public consultation on Pillar One – revenue sourcing closed. The OECD recorded 64 answers from stakeholders. Several consistent suggestions came out, especially concerning the transaction-by-transaction approach, where participants pinpointed the need to make sure that the right revenue is linked to market jurisdictions. Another common remark focused on reasonableness. Reasonableness seems to be overlooked, but because of its strong importance in practical terms, the OECD must work on it. And, like an echo, simplicity and tax certainty are strongly requested.
As regards Amount B, “the application of the arm’s length principle to in-country baseline marketing and distribution activities will be simplified and streamlined,” according to the OECD. The needs of countries with limited resources are in the spotlight and will require special consideration.
Two new public consultations are expected to be announced in the next few months.

Other workstreams

While the two-pillars plan is moving forward on the main stage, the OECD is also working backstage to try to address other hot-topic issues, such as development and transparency.

The exchange of information is also expected to encompass crypto-asset transactions. It will follow a review of the Common Reporting Standard, seven years after its adoption.

Tax administrations would be supported during the implementation of the two pillars, especially for the GloBE through tax capacity-building initiatives. Developing countries are at the core of such programs, including the digitalization of fiscal administrations.

Another important topic on the horizon is tax and gender. Recently, the OECD issued a report focusing on tax policy and gender equality, which represents the first cross-country analysis of national approaches to tax policy and gender outcomes. More than 40 countries provided a detailed survey on the topic. It resulted in an acknowledgment of specific tax reforms that more than 20 countries have introduced along with a recognized risk of implicit bias in their tax systems.

Last, but not least, the OECD has signalled its intention to address carbon pricing. It’s no secret that the international community is aware of the importance of climate change. Taxation cannot solve everything, but it can make a difference.

If, on the one hand, the OECD is focusing on tackling aggressive MNE tax planning—especially thanks to detachment from the physical nexus—on the other hand, it is addressing important social issues, such as gender inequality and climate change.

In summation, there is still a lot of work to do going forward, but such generalized consciousness-raising projects are really encouraging.

Source: MNE Tax