The OECD’s BEPS 2.0 Encroaches on the Sovereignty of Countries

I have no desire to get political. But I have to admit that I am not at all a fan of the OECD’s BEPS 2.0 Pillar Two (don’t much like Pillar One either but that’s beyond the scope of this commentary). My hope is that the Trump Administration can either kill it completely or at least get US multinationals and US operations out of its application. In my view, the OECD has gone way too far in encroaching on the sovereignty of countries in adopting their own tax policy and has written overly complex rules which will never work in the real world and which are likely unnecessary in any event.

The underlying premise of P2 is well known by now — that all large multinational corporations ( over 750 million euro of average revenue) should pay at least 15% tax on their accounting profits by country. Doesn’t sound like a bad concept? This would be achieved in one of three ways (if less than 15% tax was paid): either a 15% tax ( on accounting profits) would be paid in the country of operations (referred to as the qualified domestic minimum tax or QDMT), the ultimate parent country (or an intermediate holdco if the ultimate parent country did not do so) would collect any tax shortfall below 15% via an Income Inclusion Rule (IIR) , or if no QDMT or IIR applies than all implementing countries in which the multinational group operates would share any tax shortfall (UTPR). Getting to already sound more complicated, eh?

One key problem with the rules is that they are based on generally accepted accounting principles used in consolidation by the ultimate parent. That could be US GAAP, IFRS or some other country GAAP. No country that I know of uses GAAP to determine taxable income. No tax authority or local tax agent fully understands even local GAAP, much less the various international versions of GAAP. The OECD staff, to their credit are trying to make adjustments for deferred tax and other items. But as I have written before,it’s an inappropriate starting point, has a completely different purpose, and in my view is not administable (See James J. Tobin, Corporate Alternative Minimum Tax (CAMT) — International Aspects, 51 Tax Mgmt. Int’l J. No. 9 (Sept. 2, 2022); James J. Tobin, Model GloBE Rules — Hard to Digest, 51 Tax. Mgmt. Int’l J. No. 3 (Mar. 4, 2022)).

Other than being a dumb idea , why should the new administration try to block it or exempt the US? The answer is because it could cede some of our tax base to foreign counties and hurt US business.

Under the design of the rules, most tax credits ( except refundable credits) are not qualifying reductions of the required minimum tax of 15%. Thus at a 21% headline rate in the US, with the new administration on record of wanting to reduce it to 15% in certain cases, the use of R&D and other tax credits could well reduce a company’s effective tax rate for a particular year to under 15%. Plus tax to GAAP differences could also cause or exacerbate the issue. In such case for a US MNC, any tax shortfall would be payable to countries where the group has subsidiaries which have adopted the UTPR rules, thus at least partially undoing the benefit of the tax credits or low tax rate the US tax policy sought.

And the problem is not limited to the US tax base. Any CFCs which incurred less than a 15% tax rate (on accounting profits) would also have their tax shortfall allocated to participating UTPR countries. But first the US MNC would have to assess whether the IIR could apply. Since as currently envisaged, the US GILTI regime would not qualify as a “good” IIR (since it computed on an aggregate rather than a per country basis), any intermediate holdco in the MNCs group could first apply its IIR to any tax shortfall before the UTPR would be allocated and applied. Just in case the above doesn’t seem complicated enough, any GILTI or subpart F tax would be considered “pushed down” to the CFCs for purposes of the IIR or UTPR but not for any QDMT. Obviously!

So countries are all “encouraged” to adopt a QDMT. In theory, any tax shortfall would be taxed under an IIR or UPTR otherwise—so why not collect the tax first? Whether the country thought it’s fiscal budget was in need of tax collections at 15% or not. This will also be a potential cost to USMNCs. First, there is the question of whether all QDMTs are eligible for foreign tax credit. The IRS has produced no public statement on this. I would think the basic design of the QDMT would qualify but given the base on accounting profits, some funky deferred tax rules, complex rules regarding acquisitions, etc. I’m not so sure. At least one would want to review how the QDMT was implemented in each country absent the IRS issuing per country guidance—which may cost companies in audit fees if nothing else. And even if creditable, can the US MNC use the credits? Since GILTI credits don’t carryover, a QDMT will often be a cost in any event. In some cases perhaps, one would be better off not qualifying for a credit.

How about US groups owned by foreign parents? Seems to me similar problems arise. The new administration is encouraging foreign companies to move manufacturing to the US—avoiding duties and creating jobs. As above, these companies could see years in which their tax rate (which would likely be based on non US GAAP) could be less than 15%. In such case, either IIR or the UTPR could apply to the US tax shortfall. Plus any CFCs under the US group would also have to be analyzed for a foreign IIR or UTPR. But don’t forget to push down subpart F or allocated GILTI tax first!

Do we really need these rules and the complexity they bring? BEPS 1.0 contained 15 planks of anti-avoidance rules. Did the OECD need to do more? So far the OECD “guidance” on P2 is over 300 pages (and more dropped this week). And no doubt a lot more “guidance” will come from implementing countries. The US Corporate Alternative Minimum Tax (CAMT) proposed regulations are over 600 pages. (Note the CAMT likely would not qualify as an QDMT due, like GILTI , to its overall approach). Almost all of the guidance is based on the accounting/tax differences. I call upon the new administration to repeal the CAMT and either block P2 or get the US excluded. Note that as of this writing, neither China or India have signed up for P2. (And the US and China are number 1 and 2 on the Fortune 500 global list in terms of locations of ultimate parent MNCs.) Why should we?

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

James J. Tobin, Esq., retired, is the former Global Tax Director for international tax for Ernst & Young LLP. The views expressed herein are those of the author and do not necessarily reflect those of Ernst & Young LLP.

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