Week in Insights: OECD Needs to Find Pillar Two’s Happy Medium

As the OECD continues to promote Pillar Two, balancing the goal of fostering tax fairness with the need to avoid excessive compliance burdens is a challenge.

For many multinational enterprises operating in jurisdictions with tax rates above the Organization for Economic Cooperation and Development’s 15% minimum, the increasing complexity of compliance requirements presents a concern. Enforcing the minimum rate places much administrative overhead on reporting MNEs.

Businesses that already operate in higher-tax jurisdictions—not the targets of Pillar Two—can still face significant costs of demonstrating their tax compliance.

The National Foreign Trade Council has called for the OECD to reduce this overhead by making two temporary safe harbors permanent: country-by-country reporting and protection from an undertaxed profits rule. If the OECD doesn’t budge, some MNEs in high-tax jurisdictions likely will pay more in preparing their filings than they owe under Pillar Two.

The OECD is in an unenviable position. For Pillar Two to effectively bring about tax fairness and curb the use of low-tax shelters, the rules must close as many loopholes and cover as many edge cases as possible. But with each additional filing requirement, the burden on compliant businesses and the opposition to Pillar Two grow.

The rationale for the temporary safe harbors is that they give MNEs time to develop processes and strategies to obtain the information required to complete full information returns. Ideally, MNEs in high-tax jurisdictions would use that time to make changes to permanently reduce compliance costs.

The OECD could compromise with the business group by extending the safe harbor periods rather than making them permanent. The transitional safe harbors begin to expire at the end of 2026. Postponing the expiration of the provisions to 2030 would help alleviate compliance anxiety without weakening the fight against tax avoidance.

—Andrew Leahey

Welcome to the Week in Insights for Bloomberg Tax’s latest analysis and news commentary. This week, experts examined the proposed corporate alternative minimum tax regulations, carbon capture tax credits, and more.

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Insights

Adviser Joseph Floyd analyzes the impact of a new PCAOB standard, comparing external oversight of audit firm quality control to Paul Volcker’s Arthur Andersen plan in 2002.

DLA Piper’s Augusto Mancinelli and Marcelo Etchebarne say countries that don’t have double taxation treaties with Argentina, such as the US, can benefit most from its new tax incentives measure.

Deloitte’s Jamie Bedford and Alexander Duric explain new UK guidelines on transfer pricing best practice and how multinationals can follow the guidance to manage compliance.

Kean Miller’s Jaye Calhoun says the Illinois Supreme Court should reverse the appellate court’s decision upholding a motor fuel tax on “book-out transactions.”

Davis Polk’s Corey Goodman and Kara Mungovan say proposed corporate alternative minimum tax regulations would complicate compliance work and M&A decision-making.

Plante Moran’s Robert Malmstadt says taxpayers can address possible Subpart F inclusion by changing their US entity classification election, among other options.

Kirkland & Ellis’ Sam Kamyans, Jarrod Gamble, and Amir Azinfar review carbon tax credit questions, saying the IRS should accept contractual solutions from industry players.

Kellogg’s Aaron Yoon says corporate trends prompt the need to add ESG to accounting training.

Columnist Corner

Technically Speaking design by Jonathan Hurtarte/Bloomberg Tax

Taxing artificial intelligence models and investing the revenue in a sovereign wealth fund would improve distribution and preservation of the technology’s public benefits, Andrew Leahey argues in his latest Technically Speaking column.

“Even a modest-sized fund could provide targeted safety nets for future generations,” Andrew writes, adding that an AI version could follow the example of the Alaska Permanent Fund, which is supported by a severance tax on oil revenue. Read More

News Roundup

Varian Ruling Opens Door for More Companies to Seek Deductions

More companies may get a boost from Varian Medical Systems’ recent court victory over the IRS and its ability to take advantage of a loophole in the 2017 tax-overhaul law. Read More

Crypto Tax Payments Get Few Takers as More States Eye Programs

In the two years since Colorado became the first state to accept cryptocurrency for payment of taxes, it hasn’t collected enough revenue to cover the cost of a single Bitcoin. Utah, the only other state to accept digital currency for taxes, hasn’t received any payments at all. Read More

Countries Raise Corporate Tax Rates After Years of Decline

Corporate income tax rates across the world stabilized in 2023 after years of decline, according to a new report from the OECD summarizing international taxation trends. Read More

Hazy Conservation Easement Guidance Prompts Confusion, Backlogs

Taxpayers are seeking more guidance on conservation easements as the IRS continues to disallow deductions without providing clarity on how to take them without risking a major penalty or costly litigation. Read More

Tax Management International Journal

Companies should strategize identifying and understanding the appropriate tax incentives established under The Inflation Reduction Act, CHIPS Act, and the US Foreign-Trade Zones Program in order to promote their financial goals, say KPMG’s Amie Ahanchian, Sarah Messeih, and Kelsey Latham.

As the IRS has seen more success in transfer pricing enforcement cases, taxpayers should re-evaluate their current transfer pricing documentation and defense strategy and determine whether a proactive approach through the APA or ICAP program could reduce its global transfer pricing exposure, says Grant Thornton’s Steven C. Wrappe.

The adoption of anti-treaty shopping measures like the principal purpose test in Latin American jurisdictions complicates the analysis of whether treaty benefits will continue to be available for holding companies, and the scope of protection for a grandfathered holding structure remains unclear, say KPMG’s Armando Lara Yaffar and Quyen Huynh.

Tax Management Memorandum

Taxpayers generating, selling, and using federal renewable energy credits should beware of potential state tax liability if a state doesn’t conform to federal income exclusions, warn KPMG’s Daniel De Jong and Jasmine Desai.

Career Moves

Anna Anthony was appointed UK managing partner of Ernst and Young.

Jackie Cook joined Honigman as partner in its real estate practice group in Bloomfield Hills, Mich.

Craig Reid joined Armstrong Watson as a partner and head of its accounting and business services team in Glasgow.

Alex Tostevin joined Greenberg Traurig as shareholder in its tax practice in London.

Wesley Boldewijn joined Greenberg Traurig as a partner in its tax practice in Amsterdam.

Candice Nichol joined McDermott Will & Emery as a partner in its tax practice in London.

If you’re changing jobs or being promoted, send your submission to TaxMoves@bloombergindustry.com for consideration.