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OECD Draft Seeks GILTI Exemption from Global Minimum Tax (2)

Sept. 18, 2020, 11:50 PMUpdated: Sept. 21, 2020, 1:55 PM

Countries will be asked to agree that the U.S.'s minimum tax rules will be exempt under an OECD-led effort to set a minimum global tax rate, according to a discussion draft seen by Bloomberg Tax.

The treatment of the U.S.'s global intangible low-taxed income rules, known as GILTI, has been a major concern for U.S. companies, who fear having to comply with both the 2017 tax law and a global minimum rate under the OECD’s plan to rewrite international tax rules. The U.S. would potentially have to change existing law to comply with Pillar Two without the exception.

The Organization for Economic Cooperation and Development’s Pillar Two draft didn’t elaborate on technical aspects of how the two regimes would interact. The GILTI exception would be reviewed if there are legislative or regulatory changes that would weaken the U.S. law, the draft said.

If countries agree, the U.S. rule would be considered an acceptable income inclusion rule—one part of the set of proposed rules making up Pillar Two, which lets a multinational’s home country make up the difference if the company is paying less than the minimum rate elsewhere.

Technical questions to be considered would include how to coordinate the two regimes when there are U.S. intermediate parent companies of foreign groups headquartered in countries that have an income inclusion rule. The document also indicated that countries hoped the U.S. would rein back application of its base erosion and anti-abuse tax, another provision from the 2017 tax law, on payments made to entities that are subject to Pillar Two’s income inclusion rule.

Pillar One Skepticism

While the OECD’s Pillar Two would create a global minimum tax, the project’s Pillar One aims to address concerns that multinationals—especially tech companies—aren’t paying enough tax where they have users or consumers by reallocating a portion of their profits.

A 2019 proposal from U.S. Treasury Secretary Steven Mnuchin that would let companies opt into the rules has proved a major hurdle in the negotiations. Other countries have criticized the idea, arguing it would make Pillar One unworkable.

A revised discussion draft on Pillar One, also seen by Bloomberg Tax, said jurisdictions outside the U.S. believed the safe harbor proposal would encourage more countries to create unilateral digital tax measures, undermine the aims of Pillar One, and make global agreement less likely.

Neither draft represents a consensus view. They are being circulated for comments among countries participating in discussions. The OECD is asking countries to provide feedback on the draft before a meeting in October.

The OECD declined to comment.

—With assistance from Kaustuv Basu

(Updates OECD response in last paragraph of Sept. 18 story. Previous version added details on Pillar Two draft in 4th and 5th paragraphs and subhead on Pillar One draft. )

To contact the reporter on this story: Isabel Gottlieb in Washington at igottlieb@bloombergtax.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com