New international rules could set a minimum tax rate for multinationals as part of the OECD’s project to address concerns about taxation of the digital economy.

The Organization for Economic Cooperation and Development’s May 31 plan outlined approaches it’s considering for adopting a global minimum tax rate on multinational entities, and rules to let countries deny deductions for payments that aren’t subject to at least that minimum rate.

The plan is the second of two “pillars” of work in the OECD’s project to rewrite international tax rules dramatically, driven by rising concern that multinationals, particularly those operating in the digital economy, aren’t paying enough tax or aren’t paying it in the right places.

After a European effort to tax the digital activity of tech giants like Alphabet Inc.’s Google and Facebook Inc. stalled earlier this year, France, the U.K., Italy, and other European countries are pursuing their own plans. Opponents of such unilateral efforts have argued countries should wait for an OECD agreement by the end of 2020.

The first pillar, also detailed in the report, would develop new standards of taxable presence that allow countries to tax companies that don’t have physical presence and new methods of reallocating taxable profits among jurisdictions.

The May 31 blueprint said the countries must agree to “the outlines of the architecture” of the plans by January 2020 to deliver a solution by the end of that year. Once there’s final consensus on a solution, countries will likely adopt new rules through domestic legislation and changes to tax treaties.

Countries including France and Germany are pushing for the OECD to adopt a global minimum tax to stop a “race to the bottom” in tax rates and to protect countries’ tax bases. The minimum tax plan would address criticisms that the OECD’s years-long work to crack down on corporate profit shifting and base erosion—known as BEPS—hasn’t gone far enough.

It’s been easier to find agreement on the global minimum tax and anti-base erosion—or “GLoBE"—proposal than the “pillar one” work on nexus and profit allocation, Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, told reporters on a May 23 call.

“The beauty of working together on this is that if all the countries move on their own, and they have the right to do so, it’s chaotic or not well-articulated, not efficient,” he said. “For companies it’s also a nightmare. While having them agreeing on a common mechanism is actually a big win for everybody, except for very low-tax jurisdictions.”

The U.S. enacted a global minimum tax of its own in its 2017 overhaul, the global intangible low-taxed income (GILTI) regime.

Income Inclusion Rule

The OECD plan detailed two sets of related rules that would form the minimum tax and anti-base erosion measure.

The goal of an income inclusion rule is to ensure a multinational “would be subject to tax on its global income at the minimum rate regardless of where it was headquartered,” the OECD said. Options include a “top up tax” that would raise the level of tax paid to meet the minimum, and use of a fixed percentage or a “range or corridor” of minimum rates.

To avoid unintended consequences, like a highly taxed entity becoming subject to the minimum tax rules, the OECD will explore ways to simplify the rules, the organization said.

The OECD is also considering how to determine when income is subject to an effective minimum rate, whether to include carve-outs for regimes that otherwise comply with the OECD’s standards preventing harmful tax practices, whether to let taxpayers “blend” high- and low-tax income to achieve an effective rate that meets the minimum threshold, and how to coordinate these rules with withholding taxes and transfer pricing, or transactions between related companies.

Tax on Base-Eroding Payments

Another series of proposals lets jurisdictions deny deductions on payments or items of income not subject to tax at the minimum rate.

The work will consider what kinds of payments should be subject to an undertaxed payments rule and how to make tax adjustments when needed, as well as how to design a “subject to tax” rule and how it would interact with withholding taxes, among other issues.

The GLoBE work will also consider how the measures align with European Union rules and other international obligations, the report said.