On 10 July 2021, the G20 finance ministers endorsed the key components of the two-pillar proposals to address today's tax challenges. The revised version of Pillar One, which deals with the re-allocation of taxing rights, will affect the world's largest and most profitable companies (global turnover in excess of EUR 20 billion and a profit margin of at least 10%). Pillar Two, which introduces a global minimum effective tax rate of at least 15%, will apply to all MNEs with a global turnover of at least EUR 750 million.
While the G20 endorsement of the revised proposals was expected, the formal seal of approval from the G20 finance ministers is an important milestone for the two-pillar solution, giving the proposals further impetus.
The finance ministers of the G20 nations announced on Saturday 10 July that they have endorsed the revised proposals as presented in the 1 July 2021 “Statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy” published by the OECD Inclusive Framework.
The G20 finance ministers have also invited the members of the OECD Inclusive Framework (OECD IF) who have not yet joined the agreement to do so. In its communiqué, the G20 also urged the OECD IF to address any remaining issues and to draft a detailed plan for implementation before the next G20 meeting in October.
The revised proposals
Pillar One will introduce measures to re-allocate taxing rights of residual profits of large multinationals. The aim of Pillar One is to tax profits in the jurisdiction where revenue is sourced. While the October 2020 Blueprint originally limited the scope of Pillar One to multinationals (MNEs) operating in Automated Digital Services (ADS) and Consumer Facing Business (CFB) industries, the OECD IF agreed on the wider scope as proposed by the Biden administration in April 2021. The wider scope of Pillar One will affect businesses with a global revenue of at least EUR 20 billion and a net profit margin in excess of 10%. According to the proposal, after 7 years the scope could be broadened to cover a global revenue threshold of at least EUR 10 billion, conditional upon successful implementation, including regarding certainty of Amount A. The net profit margin of 10% is not anticipated to change. By limiting the scope of Pillar One to only MNEs with a very significant global revenue threshold, while at the same time extending the industry scope, Pillar One will likely target the top 100 or so largest and most profitable companies in the world. The extractives and regulated financial services industries remain out of scope of Pillar One.
Pillar Two will introduce a global minimum effective tax rate of at least 15% by introducing Global Anti-Base Erosion (GloBE) rules to ensure that all profit of MNEs is "adequately" taxed. GloBE rules will apply to all MNEs with a global turnover in excess of EUR 750 million. The international shipping industry is excluded from Pillar Two.
The GloBE rules will have the status of a common approach among OECD IF members, meaning that the members will not be required to implement GloBE rules, but should the member choose to do so, the GloBE rules should be administered in a way that is consistent with Pillar Two. The adoption of Pillar Two by an overwhelming majority of jurisdictions will likely change the international tax landscape dramatically. The OECD IF statement says members “would implement” the subject‑to‑tax rule (STTR) into their bilateral treaties with developing IF members when requested to do so.
Within the EU, it may be challenging to implement the revised Pillar Two proposal by way of an EU Directive as at least two EU member states (i.e., Hungary & Ireland) have, so far, disagreed with the proposed rate, and Estonia also has expressed reservations. The proposed EU Directive would require unanimous consent, assuming the EU cannot find a legitimate basis to implement Pillar Two through a qualified majority voting approach.
What is still unclear?
While a lot of details about the proposals have been released, a lot remains uncertain.
For Pillar One, uncertainty remains about the sourcing rules. It is unclear whether the marketing & distribution revenue will be considered in scope of a “safe harbour” reducing exposure to Amount A, when MNEs already allocate a significant amount of marketing & distribution activities to a source jurisdiction in accordance with current transfer pricing rules.
For Pillar Two one of the key questions remains as to how the GloBE rules will co-exist with the US GILTI regime. In light of the current legislative initiative relating to GILTI, the OECD IF agreement states that “consideration will be given to the conditions under which the US GILTI regime will co-exist with the GloBE rules, to ensure a level playing field.” Those conditions would likely take into account whether the GILTI rate ends up below 15% and whether GILTI continues to be applied on a jurisdiction by jurisdiction basis. Another key question is how the GloBE rules will co-exist with an OECD-approved patent box regime.
Tax compliance is an issue for both pillars. For Pillar One, it appears that the OECD IF agreement is envisaging a streamlined process in which a single entity within an MNE could manage the process. This does not necessarily involve a “one stop shop” where the competent authority of the parent entity would act as a central filing location or a “paymaster” or main tax collector for the additional Pillar One tax revenue, and OECD officials have since said centralization of payment is not a realistic option. The nature of simplification options for Pillar Two compliance remains undecided.
All eyes return to the OECD’s Inclusive Framework, which is scheduled to meet again in October to adopt a final version of the agreement that is supposed to resolve the outstanding issues, as well as an implementation plan and timeline. The general intention is to have a Multilateral Convention ready for signing in 2022. The implementation of the Pillars One and Two proposals is scheduled for 2023, according to the OECD IF agreement. This date seems extremely ambitious, especially in light of the number of details that have yet to be worked out, and it remains to be seen whether the ambitious goal will be met.