Implementation of GloBE Rules: A Sensible Safe Harbor Is Needed

On March 14, 2022, the OECD issued a lengthy commentary on the GloBE (Pillar Two) Model Rules with a number of illustrative examples, and the accompanying press release was a bureaucratic version of “mission accomplished.” Pascal Saint-Amans, the director of the OECD’s Centre for Tax Policy and Administration, was quoted as saying, “With the completion of the technical work on the Model Rules and Commentary, Inclusive Framework members now have all the tools they need to begin implementing the rules.”

Since the commentary was published, the European Union finance ministers have met twice to discuss the draft EU directive on implementing the Model Rules in the laws of the member states. Twice, they have failed to reach agreement. Poland insists that the October 2021 global agreement on a two-pillar solution to tax challenges of digitalization was premised on simultaneous implementation of Pillars One and Two, and the Pillar Two rules therefore should not be adopted on a standalone basis. Meanwhile, the U.S. does not appear to be anywhere near implementing either of the two pillars and, in the absence of U.S. participation, implementation by other countries may not make sense. The entire two-pillar project has been motivated by a desire to address perceived avoidance of corporate income taxes by global multinationals, the largest and most profitable of which are U.S.-based.

Elsewhere in the world, there appears to be little movement toward implementing the Pillar Two Model Rules. The U.K. has issued a consultation document but, in light of past statements by the U.K.’s most senior international tax official, it is far from certain that the U.K. would actually adopt the Model Rules into U.K. law if the U.S. and the EU member states were not seen to be adopting them along with Pillar One rules. The Swiss government has announced that it will require a constitutional amendment to proceed with implementing the global deal. And in the developing world, where reservations about the deal were widely expressed at the time it was made last October, there haven’t been any signs of movement toward implementation.

The OECD is conducting a public consultation on the implementation framework for Pillar Two. This presents an opportunity to improve the GloBE rules by creating a safe harbor that would be simple, sensible, and fully in keeping with the policy rationale for the rules. Such a safe harbor might be what is needed to keep the entire two-pillar project alive.

In its October 2021 statement on the two-pillar solution, the Inclusive Framework contemplated the use of a safe harbor, saying: “To ensure that the administration of the GloBE rules are as targeted as possible and to avoid compliance and administrative costs that are disproportionate to the policy objectives, the implementation framework will include safe harbours and/or other mechanisms.”

This reference to “the policy objectives” raises the question of what the policy objectives of the GloBE rules actually are. To find them, it’s necessary to go back to the Inclusive Framework’s January 2019 policy statement on tax challenges of digitalization, which includes the following:

“These challenges included risks remaining after BEPS for highly mobile income producing factors which still can be shifted into low-tax environments …. [Pillar Two] addresses remaining BEPS issues ….[The] features of the digitalising economy exacerbate BEPS risks, and enable structures that shift profits to entities that escape taxation or are taxed at only very low rates …. The proposal under this pillar would be designed to address the continued risk of profit shifting to entities subject to no or very low taxation through the development of two interrelated rules, i.e. an income inclusion rule and a tax on base eroding payments.”

Thus, it appears that the main policy objective of the GloBE rules is to prevent multinational enterprises, or MNEs, from achieving “no or very low taxation” on profits via the shifting of profits within the MNE group. It would be fully consistent with this policy objective to include a safe harbor in the framework that would simplify things. This could be achieved by removing from the GloBE system all countries that have tax laws that effectively ensure that MNEs could not achieve no or very low taxation of profits shifted to that country.

If a country’s statutory tax rate on the profits of in-scope MNEs is higher than the GloBE minimum tax rate of 15%, and the country’s laws do not include any preferential regimes that have been identified as harmful by the OECD, then it would not be possible for an in-scope MNE to achieve no or very low taxation of profits shifted to that jurisdiction. In this regard, it should be noted that the OECD’s definition of a harmful preferential regime includes two factors aimed at profit shifting: that the preferential regime imposes no or low effective tax rates on income from geographically mobile financial and other service activities, and that the regime is ring-fenced from the domestic economy.

For any country in the “angels’ list” of jurisdictions meeting these tests, MNEs would not be required to compute a jurisdictional effective tax rate for GloBE purposes, as there would be no policy justification for such a requirement. It follows that all profits arising in the countries on the list would not be subject to any top-up taxation under the GloBE rules as, again, there would be no policy justification for including such profits in the top-up taxation regime of the rules.

It’s as simple as that. Unfortunately, the OECD and Inclusive Framework have not done much in the course of the two-pillar project to inspire confidence that they can embrace a simple, sensible way of achieving their stated policy objectives. But hope springs eternal.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners. 

Author Information

Jeff VanderWolk is a partner at Squire Patton Boggs (US) LLP.

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