The OECD opens a public consultation for its proposals on digitalisation of the economy under Pillar Two (rules for tackling the erosion of tax bases and the transfer of profits)
Published by Lexology
Article by: Osborne Clarke – Daniel Rioperez and Ana Malagon
On November 8, 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... published for public consultation a document with the proposal on the anti-abuse rule and the establishment of a global minimum taxation, known by the acronym GloBE (Global-Anti Base Erosion Rule), in the framework of the so-called Pillar Two. 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... hopes this new document will represent a step forward in the search for international consensus in order to provide an answer to the current challenges posed by the digitalisation and globalisation of the economy.
It is worth to briefly recall that 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... is working in order to reach a political agreement among the countries member of the Inclusive Framework on the development of measures to solve the outstanding issues of 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... actions, in particular Action 1, and to settle the tax challenges arising from the digitalisation and globalisation of the economy. For this purpose, in January 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... published a policy statement and a document for public consultation which included a proposal whereby all measures to be agreed on should be grouped in two categories (Pillar One and Pillar Two).
In the development of Pillar One during October 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... released for public consultation the measures of the “Unified Approach” (analysed in our October newsletter) which proposes the redefinition of the nexus rules and a new distribution of taxation rights. In the proposed approach, 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... moves away from traditional concepts of international taxationFOR MORE INSIGHT ON INTERNATIONAL TAXATION, PLEASE READ THIS ARTICLE: Introduction to International Taxation: Key Concepts & Guidelines International Taxation encompasses the framework of laws, principles, and treaties that govern the tax obligations of individuals and entities engaged in economic activities that span multiple jurisdictions. This field addresses how income, profits, and gains are taxed when operations or investments extend... based on the existence of physical presence in order to grant taxation rights mainly to countries where users are located. The practical application of this new approach would primarily affect highly digitalised sectors, as these sectors can access market jurisdictions with little physical presence.
On 8 November 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... published for public consultation the document with the proposals for Pillar Two. In this document, the OECD’s starting point is that setting rules for the establishment of a global minimum taxation on corporate income would help reducing tax competition between jurisdictions and prevent large groups from organising themselves on the basis of the tax advantages offered by each state. It also proposes a global rule to ensure that the profits of multinational companies are subject to a minimum tax threshold.
However, the proposal of the Global-Anti Base Erosion Rule (GloBE) does not address a fundamental aspect: the actual minimum percentage level of taxation which would be considered acceptable. It does nevertheless indicate that this minimum taxation threshold should be understood to refer to effective taxation.
The global rule sets out four specific measures, which should be implemented in an order of strict priority so as to reduce 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.... The specific measures included in the document are as follows:
- Income inclusion rule
Under this rule, the income of foreign subsidiaries or foreign branches would be subject to tax provided, in the country of residence, such income has been subject to taxation at an effective tax rateThe Effective Tax Rate (ETR) measures the percentage of a company’s pre-tax profits that is paid as tax. Unlike statutory tax rates, which are legally prescribed by a jurisdiction, the ETR provides a more accurate picture of a company’s actual tax burden by incorporating various deductions, credits, and exemptions available. It is a crucial metric for assessing a company’s tax... that is below the minimum rate considered acceptable.
- Undertaxed payments rule
This rule provides for the non-deductibility or the even the taxation at source of payments made to related parties where the income would not be subject to tax above the minimum acceptable rate in the country of residence.
- Switch-over rule
Under this rule, switch-over clauses would be included in 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... treaties, so as to allow the country of residence not to apply the exemption method. Instead, the deduction method should be applied in those cases where profits attributable to a permanent establishment (PE) or income derived from immovable property obtained without PE are subject to taxation below the agreed minimum at source.
- Subject to tax rule
Finally, this rule, which would complement the rule above, would allow the source state to impose withholding or any other tax and to refuse the benefits of the 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... convention when the income is not subject to taxation at the minimum acceptable rate in the state of residence.
The document itself acknowledges that the practical application of the proposed rules poses technical difficulties. For the time being, however, 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... is focusing on the development of the first income inclusion rule. In relation to this, 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... raises three essential aspects for consultation:
I. The calculation of the taxable base or starting point to determine the tax rate actually borne by the taxpayer. In this context, 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... suggests referring to financial statements as the basis to facilitate tax rate calculation, although 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... does note that rules to harmonize these financial statements will be needed.
II. The assessment of whether the entity is above the required level of minimum (blending). In other words, whether consolidation of results should somehow be allowed and, if so, whether such consolidation should be permitted by combining:
- The various benefits obtained by the same entity, allowing mixing benefits subject to a high taxation with others subject to a lower taxation.
- The aggregated profits obtained by the different entities belonging to the same group in each jurisdiction.
III. Finally, 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... consults whether other methods should be established to exclude or limit the application of the proposed rule, taking into consideration specific sectors or regimes. 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... does not, however, suggest which of them should be excluded.
The practical application of these rules would require amendments to national legislation and 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... treaties and would imply significant changes in international tax rules currently applied by multinational companies.
It is interesting to highlight two aspects of the proposals of this Pillar Two. Firstly, its application would transcend the field of digital business; and secondly, an anti-abuse rule is put forward which does not require the existence of abuse to apply. On the contrary, the existence of abuse would be established based on objective parameters.
Finally, it should be noted that despite the apparent political consensus on the measures proposed in the two pillars, the high technical complexity of their implementation implies that, in practice, the changes still seem farFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish.... However, 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... intends to obtain a political agreement on them during January 2020 in order to work on the technical configuration and design of the measures during the year 2020.
