The proposed reforms would be the most significant changes to the international tax system in recent history.
In a communique released over the weekend the G20 has endorsed two significant tax reform initiatives led by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) (the Inclusive Framework), known as “Pillar One" and “Pillar Two".
The G20 together comprise more than 80% of the world's GDP and 75% of global trade, and include the G7 nations (the US, UK, Japan, Canada, France, Italy and Germany), as well as Brazil, China, India, Indonesia, Russia, and the European Union. The G20 throwing its support behind Pillars One and Two is a significant endorsement of the proposed reforms.
The announcement comes just over a month after the G7 countries announced that they would support similar proposals, and less than two weeks after 130 jurisdictions (including New Zealand) participating in the Inclusive Framework joined a statement in support of Pillar One and Pillar Two.
What are Pillars One and Two?
- Pillar One: Market jurisdictions would be given a new right to tax profits of certain multinational enterprises, regardless of whether the multinational has a physical presence in that jurisdiction. In addition, a new, simplified approach for determining the income attributable to marketing and distribution activities carried out by members of a multinational enterprise in a jurisdiction would be introduced.
- Pillar Two: Rules to ensure multinational groups pay a minimum amount of tax across the jurisdictions they operate in would be introduced. First, an “Income Inclusion Rule" (IIR) would require the payment of top-up tax to ensure that a minimum level of tax was paid across all jurisdictions that a multinational group operates in. The tax would be payable in the jurisdiction of the ultimate parent company of the multinational group. Second, an “Undertaxed Payment Rule" (UTPR) would apply where the parent company jurisdiction did not have an IIR. The UTPR would deny deductions for a related party payment where the payment was made to a foreign company that was not subject to the minimum tax rate on that receipt. Pillar Two would also include a “Subject to Tax Rule", which would deny tax treaty relief where such relief was dependent on an amount of income being subject to tax at a specified minimum rate in a particular jurisdiction.
Pillar One is intended to address perceived unfairness arising from multinationals paying comparatively low amounts of tax in a given jurisdiction, despite generating significant revenues from that jurisdiction. Pillar Two is intended to prevent a “race to the bottom" in corporate tax rates where jurisdictions lower their corporate tax rates in order to attract multinationals to either transfer their headquarters or high value intellectual property assets to such jurisdictions.
See our previous article on Pillars One and Two.
A statement from the Inclusive Framework on 1 July added further detail to the Pillar One and Two proposals:
- Pillar One would apply to multinational groups with global turnover of more than €20 billion and profitability above 10% (with the turnover threshold potentially being reduced to €10 billion, depending on the outcome of a review to be carried out seven years after Pillar One's implementation). Those in the “Extractives" and “Regulated Financial Services" industries would not be subject to the Pillar One reforms.
- For an amount of profit to be allocated to a market jurisdiction under Pillar One, the multinational group must derive at least €1 million in revenue from that jurisdiction (subject to a lower threshold for jurisdictions with low GDP).
- Once that revenue threshold is exceeded, between 20-30% of residual profit of the multinational group (defined as profit in excess of 10% of revenue) would be allocated among market jurisdictions. Profit would be sourced to end market jurisdictions where goods or services are used or consumed. To facilitate the application of this principle, detailed source rules for specific categories of transactions will be developed.
- For the purposes of Pillar Two, the minimum tax rate for the purposes of the IIR and UTPR will be at least 15%.
- Pillar Two would apply to multinational enterprises with at least €750 million of global turnover. This threshold is significantly lower than the revenue threshold for Pillar One, with the consequence that Pillar Two will apply relatively more broadly.
- Consideration will be given to the interaction between Pillar Two and the US Global Intangible Low Taxed Income Regime (GILTI) regime. This US specific tax regime serves a similar purpose to the IIR under Pillar Two rules.
The G20 communique calls on the Inclusive Framework to finalise the design elements of BEPS Pillar One and Two, together with a detailed plan for implementation of the two pillars to be ready by the time the G20 next meets in October 2021.
The earlier statement from the Inclusive Framework proposes a similarly aggressive timeline for the implementation. An October 2021 deadline for finalising a detailed implementation plan and ironing out of remaining issues is also proposed. The statement also proposes that Pillars One and Two would be brought into law in 2022 and become effective in 2023.
The growing tide of international support for Pillar One and Two means that those reforms are almost certain to become reality. The reforms will be the most significant changes to the international tax system in recent history.
If you have any questions about the matters raised in this article please get in touch with the contacts listed or your usual Bell Gully adviser.