1. Why is implementation of the new tax rules under Pillars One and Two looking so uncertain?
There are several factors at work, one being the failure to achieve consensus in the European Union on a draft directive to implement Pillar Two’s global minimum tax regime. First Poland, and then Hungary, objected to going forward on Pillar Two in the absence of any steps toward implementation of Pillar One, since the October 2021 agreement covered both pillars. The subsequent termination by the US of its tax treaty with Hungary, apparently in retaliation for Hungary’s opposition to the draft directive, has contributed to the feeling that last October’s unity has turned to discord.
Another factor is the lack of movement in the US Congress toward passage of implementing legislation regarding either of the two pillars. The leading Republican tax writers in Congress have become increasingly skeptical of the OECD process over the past few months, to the point where two potential candidates to take over as chair of the House Ways and Means Committee sent a thank-you note to the Hungarian government after Hungary blocked the Pillar Two directive. Additionally, at least one Senate Democrat opposes legislation that would raise taxes on multinational corporations by bringing the US GILTI rules more into line with the Pillar Two model rules.
Third, there is a sense that many countries are waiting to see whether other countries will go first. Implementing the OECD’s model rules for global minimum tax in a country’s domestic law is not a simple proposition. The rules involve a number of radical departures from well-established norms; thus, no one can be sure of the consequences of adopting the new rules.
Moreover, the OECD and the Inclusive Framework delegates are still working on important elements of the rules, such as administrative procedures and simplifying safe harbors that will be very important in practice for both taxpayers and tax authorities. If the EU and the US are not going ahead, then it seems most other countries will wait to see whether the effort involved in proceeding is warranted.
2. But wasn’t there strong and unified political support for Pillar One?
The proposed reallocation of taxing rights that was described at a high level in the October 2021 agreement as Pillar One evolved over several years, and it is still a work in progress. Some member countries of the Inclusive Framework are currently at odds on important elements of Pillar One, so it isn’t clear what the high-level agreement on Pillar One last year really meant.
The OECD recently issued a progress report on Pillar One’s Amount A rules. If agreed on by the Inclusive Framework, they would be the rules for reallocating taxing rights over a portion of the residual profits of large, profitable multinational groups. The report indicates that no agreement has yet been reached on important issues, such as:
- whether withholding taxes are included in the calculation of taxes that a company subject to the Amount A rules is already paying in a jurisdiction;
- whether a jurisdiction should be allowed to receive an Amount A allocation in respect of a company’s global residual profit even if the company is already reporting, and paying taxes on, its residual profit from sales in that jurisdiction; and
- how to define the type of “relevant unilateral measures,” such as digital services taxes, that countries will be prohibited from imposing.
3. Is there a real chance that Pillar One will fail to get off the ground?
Yes. The implementation of whatever may finally be agreed on as the Pillar One Amount A rules will depend on the signing and ratification of a multilateral treaty by many countries. In the words of the OECD’s progress report, “a critical mass of countries, which will include the residence jurisdictions of the ultimate parent entities of a substantial majority of the in-scope companies whose profits will be subject to the Amount A taxing right, as well as the key additional jurisdictions that will be allocated the obligation to eliminate double taxation otherwise arising as a result of the Amount A tax.”
It is estimated that more than half of the in-scope multinational companies are based in the US, which suggests that the US would be a net loser from the global reallocation to market jurisdictions of residual profits attributable to production factors such as the development of intellectual property. As in the case of Pillar Two, Republicans in Congress are not convinced that implementation of Pillar One would be in the US’ best interest. Given the outsize role of US-based companies in the Pillar One proposal, non-implementation by the US effectively would kill it.
4. But there was bipartisan support in Congress for an agreement that would eliminate digital services taxes, correct?
That is correct. However, the congressional tax writers who expressed that support at earlier stages of the project didn’t have much, if any, information about what the US would have to give up in return for other countries’ agreement to forgo the use of DSTs. Although US Treasury Secretary Janet Yellen has told Congress that Pillar One implementation wouldn’t involve a significant revenue loss for the US, the Treasury Department hasn’t provided Congress with its analysis in support of that conclusion despite repeated requests from Republican members.
Worse, the OECD’s progress report on Pillar One indicates that the “relevant unilateral measures” to be prohibited under the multilateral treaty will “not include value-added taxes, transaction taxes … or rules addressing abuse of the existing tax standards.” This appears to leave the door open for future legislation that arguably fits within one of these protected categories but has effects similar to prohibited measures.
Unless the US Treasury negotiators can change this, any chance of congressional approval for Pillar One would seem to be gone. After all, the political dynamic that led to agreement on Pillar One was driven primarily by concern over the risk of trade wars resulting from the adoption by numerous countries of digital services taxes and other unilateral tax measures aimed at nonresident—mainly US-based—companies. If Pillar One will not actually eliminate that risk, there appears to be little point in pursuing it.
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.
Jeff VanderWolk is a partner at Squire Patton Boggs (US) LLP.
We’d love to hear your smart, original take: Write for Us