OECD secretariat invites public input on the Global Anti-Base Erosion (GloBE) Proposal under Pillar Two

In May 2019, the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve.../G20 Inclusive Framework on BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... (Inclusive Framework) agreed a Programme of Work for Addressing the Tax Challenges of the Digitalisation of the Economy. The Programme of Work is divided into two pillars:

• Pillar One addresses the allocation of taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to... between jurisdictions and considers various proposals for new profit allocation and nexus rules;
• Pillar Two (also referred to as the “GloBE” proposal) focuses on the remaining BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to... or the payment is otherwise subject to low levels of effective taxation.

To make progress towards reaching a consensus solution to Pillar Two issues, the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... Secretariat has prepared a public consultation document. This consultation document was discussed by the Working Party No. 11 at its meeting on 9-10 October 2019 and by the Steering Group of the Inclusive Framework and is now released to the public for comments.

This consultation document (available soon in French) focuses on specific technical issues in respect of the GloBE proposal where input from stakeholders would be valuable in progressing the work. For purposes of this consultation, comments are welcome on all aspects of the Programme of Work on Pillar Two, but requested specifically on three technical design aspects of the GloBE proposal:

1. the use of financial accounts as a starting point for determining the tax baseThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,...;
2. the extent to which an MNEWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... can combine income and taxes from different sources in determining the effective (blended) tax rate on such income; and
3. stakeholders’ experience with, and views on, carve-outs and thresholds that may be considered as part of the GloBE proposal.

The comments provided will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020. Some of the technical and design aspects of the GloBE proposal depend on policy choices to be agreed within the context of the Inclusive Framework. For example, the mechanics and operation of the undertaxed payment rule and the nature and scope of the subject to tax rule need to be further developed by the Inclusive Framework for a clearer outline of these rules to emerge, which could then benefit from further public consultation at a future point in time.

This consultation document has been prepared by the Secretariat, and do not represent the consensus views of the Inclusive Framework, the Committee on Fiscal Affairs, or their subsidiary bodies.

Interested parties are invited to send their comments no later than Monday, 2 December 2019, 18:00 (CET), by e-mail to taxpublicconsultation@oecd.org in Word format (in order to facilitate their distribution to government officials). All comments should be addressed to the International Co-operation and Tax AdministrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... Division, Centre for Tax Policy and Administration.

1. What are the challenges that are being addressed under the GloBE proposal?

Like Pillar One, the Global Anti-Base Erosion (GloBE) Proposal proposal under Pillar Two represents a substantial change to the international tax architecture. This Pillar seeks to comprehensively address remaining BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... challenges by ensuring that the profits of internationally operating businesses are subject to a minimum rate of tax. A minimum tax rate on all income reduces the incentive for taxpayers to engage in profit shiftingProfit Shifting is a strategic practice employed by multinational enterprises (MNEs) to reduce their global tax liability by shifting profits from high-tax jurisdictions to low- or no-tax jurisdictions. The primary method involves transferring income-generating activities, intangible assets, or other high-value components within the group to countries with favourable tax regimes. Profit Shifting is a critical concern for tax authorities and... and establishes a floor for tax competition among jurisdictions. In doing so, the GloBE proposal is intended to address the remaining BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... challenges linked to the digitalisation of the economy, but it goes even further and addresses these challenges more broadly. The GloBE proposal is expected to affect the behaviour of taxpayers and jurisdictions. It posits that global action is needed to stop a harmful race to the bottom on corporate taxes, which risks shifting the burden of taxes onto less mobile bases and may pose a particular risk for developing countries with small economies. Depending on its design, the GloBE proposal may shield developing countries from pressure to offer inefficient tax incentives. The GloBE proposal is based on the premise that, in the absence of a co-ordinated and multilateral solution, there is a risk of uncoordinated, unilateral action, both to attract more tax baseThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... and to protect existing tax baseThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,..., with adverse consequences for all jurisdictions.

2. How does the GloBE Proposal seek to address these challenges?

Under Pillar Two of the Programme of Work, members of the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve.../G20 Inclusive Framework on BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... (Inclusive Framework) agreed to explore, on a without prejudice basis, issues and design options in connection with the development of a co-ordinated set of rules:

1. an income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate;
2. an undertaxed payments rule that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;
3. a switch-over rule to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum rate; and
4. a subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.

These rules would be implemented by way of changes to domestic law and tax treaties and would incorporate a co-ordination or ordering rule to avoid the risk of double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... that might otherwise arise where more than one jurisdiction sought to apply these rules to the same structure or arrangement.

3. What is the status of the work on the GloBE proposal?

Having recognised the challenges arising from the digitalisation of the economy, the G20 mandated the Inclusive Framework to deliver a solution by the end of 2020. TheProgramme of Work endorsed by the G20 Finance Ministers and Leaders in June 2019 serves as a plan for future work consisting of a two-pillar approach, aiming to provide new nexus and profit allocation rules under Pillar One and a global anti-base erosion mechanism under Pillar Two.

The Programme of Work for Pillar Two specifies that the GloBE proposal will operate as a top-up to an agreed fixed rate. The determination of the actual rate of tax to be applied under the GloBE proposal will be discussed once other key design elements of the GloBE proposal are fully developed.

The Programme of Work further sets out the key design issues that need to be addressed in the context of the GloBE proposal, including the determination of the tax baseThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,..., the extent to which the rules will permit blending and questions as to the need for (and design of) carve-outs and thresholds. This public consultation document explores each of these three technical design aspects. The comments provided from stakeholders as part of the public consultation will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020.

The Programme of Work also directs the Inclusive Framework to consider issues around rule co-ordination as well as the interaction of the GloBE proposal with other international and domestic tax rules in order to ensure that the proposal avoids the risk of double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double..., minimises compliance and administration costs, and that the rules are targeted and proportionate. Progress has been made in relation to these issues, with Inclusive Framework members actively engaged and identifying design solutions to address these challenges.

Some of the technical and design aspects of the GloBE proposal depend on policy choices to be agreed within the context of the Inclusive Framework. For example, the mechanics and operation of the undertaxed payment rule and the nature and scope of the subject to tax rule need to be further developed by the Inclusive Framework for a clearer outline of these rules to emerge, which could then benefit from further public consultation at a future point in time.

For purposes of this consultation, comments are welcome on all aspects of the Programme of Work, but requested specifically on the three technical design aspects of the GloBE proposal included in this public consultation document.

4. Which businesses are in the scope of the GloBE proposal?

Recognising, as stated in the Action 1 Report, that it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes, the scope of the GloBE proposal is not limited to highly digitalised businesses. By focusing on the remaining BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... challenges, it proposes a systematic solution designed to ensure that all internationally operating businesses pay a minimum level of tax. In so doing, it helps to address the remaining BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... challenges linked to the digitalising economy, where the relative importance of intangible assetsIntangible Assets are non-physical assets that have value due to the rights or advantages they confer on a business. Unlike tangible assets like machinery or buildings, intangible assets cannot be seen or touched but often hold significant worth. Common examples include intellectual property (IP) such as patents, trademarks, copyrights, goodwill, and brand recognition. Intangible assets are crucial for driving long-term... as profit drivers makes highly digitalised business often ideally placed to avail themselves of profit shiftingProfit Shifting is a strategic practice employed by multinational enterprises (MNEs) to reduce their global tax liability by shifting profits from high-tax jurisdictions to low- or no-tax jurisdictions. The primary method involves transferring income-generating activities, intangible assets, or other high-value components within the group to countries with favourable tax regimes. Profit Shifting is a critical concern for tax authorities and... planning structures.

The Programme of Work calls for the exploration of possible carve-outs as well as thresholds and exclusions to restrict application of the GloBE proposal. This consultation document requests input from stakeholders on their experience with, and views on, carve-outs and thresholds that may be considered as part of the GloBE proposal.

5. How inclusive is the decision-making process?

The Inclusive Framework has a global membership, including about 70{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of non-OECD and non-G20 countries from all geographic regions. The work in the Inclusive Framework is conducted on an equal footing, meaning that countries and jurisdictions, small and large, developed and developing, have an equal say in the ongoing work to address the tax challenges arising from the digitalisation of the economy. Furthermore, international organisations can act as Observers within the Inclusive Framework, and regional tax organisation such as the African Tax AdministrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... Forum and the Inter-American Centre of Tax Administrations are also represented. Input from the business community and civil society is also actively solicited.

6. How can stakeholders provide their input on the consultation document released today?

Stakeholder input is actively encouraged. A public consultation meeting on Pillar Two has been scheduled for 9 December 2019 and any interested party is welcome to attend and submit comments. Stakeholder input will be critical as the details of this proposal are further developed. Please visit our calendar of planned stakeholder input in OECD tax matters for more information.

Related Documents

• Planned stakeholder input in OECD tax matters

Source: OECD