For three years, from the autumn of 2018 to the present, the OECD/G20 Inclusive Framework on BEPS pursued a global agreement on the so-called Pillar One and Pillar Two proposals to change the taxation of large multinational enterprises. The effort apparently came to fruition on Oct. 8, 2021, when it was announced that 136 of the 140 member countries of the Inclusive Framework had agreed on a set of new rules to be implemented by 2023. The agreement has since been endorsed by the G-20 finance ministers and by the G-20 leaders at their recent summit in Rome.
The headline-grabbing aspect of the Oct. 8 announcement was the last-minute agreement of Ireland, Estonia, and Hungary to a global minimum effective tax rate of 15% on the profits of multinationals with annual revenue of at least Euro 750 million. This agreement on Pillar Two was a high priority, politically, for the U.S. Treasury and certain large EU member countries such as Germany and France.
In contrast, Pillar One has received less attention in the general news media, despite being a far more radical departure from existing international tax norms. It would create for the world’s most profitable 100 companies a new tax nexus standard and a formulary method of allocating a portion of their global profits among the countries in which they have customers.
The 137 countries now agreeing to the deal—Mauritania recently signed on—are aiming at a 2023 deadline for the enactment of necessary legislation and ratification of a multilateral tax treaty to implement the agreement. As there is no historical precedent for a global agreement of this kind regarding tax laws, it is difficult to predict with any confidence whether the deadline is a realistic one.
It is not difficult, however, to see that there is a great deal of work that remains to be done to complete the Pillar One and Pillar Two regimes. Even the most fundamental aspect of the global minimum effective tax rate of 15%—namely, how to compute it—has not yet been determined. The Inclusive Framework has agreed only that the starting point for the computation will be information reported in the taxpayers’ financial statements—as opposed to their income tax returns—subject to certain unspecified adjustments. Other key rules, such as revenue sourcing rules for determining where multinationals’ income is coming from, and rules on how to identify the countries or entities that will lose the profits that are reallocated under the Pillar One formula, also remain to be developed. And it is likely to be several months before the public sees a draft of the multilateral treaty for implementing the Pillar One rules, which will have to include unprecedented rules applying income tax concepts to a controlled group of companies rather than to separate legal entities, as well as a new international dispute prevention and resolution mechanism.
Has the OECD already done a lot of work on the necessary rules? Yes and no. A draft of model rules and commentary on Pillar Two issues leaked in August of this year reflected a substantial amount of work on many issues but left blanks to be filled in with regard to a number of important matters. On Oct. 29, 2021, the OECD published a job advertisement for a senior-level tax expert whose main responsibility would be to “lead and manage the aspects of the work on both Pillar One and Pillar Two … relating to the development of a common tax base and the tax adjustments made to financial accounting statements.” The timing of this advertisement suggests that the work in question will not be completed anytime soon.
Adding to the uncertainty regarding the implementation process is the fact that the agreement did not clarify the status of the U.S.'s GILTI rules under Pillar Two, while at the same time Congress is working on legislation to change those rules. In addition, the U.S. might have problems implementing Pillar One due to the apparent need for Senate approval, on a bipartisan basis, of a new multilateral tax treaty. The Democratic Party has an extremely slim majority in both houses of Congress. Given that the U.S. Treasury has led the multilateral process this year that culminated in the Oct. 8 agreement, the Administration needs to work closely with Congress on the domestic front to avoid a severe setback in the implementation process. By the same token, other countries will need to deal with the possibility of domestic resistance to certain commitments, such as the abandonment of digital services taxes or other relevant unilateral measures.
The Oct. 8 statement said that there would be consultation with stakeholders on the development of the new rules. So far, no indications of such consultation have been seen. The OECD and governments should maintain an open-door policy to ensure that all voices have a chance to be heard. Good policy cannot be made in a vacuum.
The current set of circumstances regarding the implementation of the global agreement suggests certain animal imagery: the dog that caught the car, or someone catching a tiger by the tail. Now that they’ve got the deal they wanted, how exactly are they going to make it a reality?
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jeff VanderWolk is a partner at Squire Patton Boggs (US) LLP.
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