OECD consults on Pillar Two tax rules to stop profit shifting

The OECD is consulting on its global anti-base erosion (GloBE) proposal which is designed to prevent multinationals from profit shifting, by developing rules which would effectively create a minimum tax rate worldwide

The proposal forms part of the remaining programme of work under the OECD’s Base Erosion and Profit Shifting (BEPS) framework, which is designed to address the tax challenges of the digitalisation of the economy.

Under this programme, pillar one is looking at the allocation of taxing rights between jurisdictions and considers various proposals for new profit allocation and nexus rules.

Pillar two, which is also referred to as the GloBE proposal, focuses on the remaining BEPS 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 rights or the payment is otherwise subject to low levels of effective taxation.

It is proposed that countries would remain free to determine their own tax system, including whether they have a corporate income tax and where they set their tax rates, but other jurisdictions would be able to apply new rules where income is taxed at an effective rate below a minimum rate.

In its background explanation to the consultation, the OECD stated: ‘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 base and to protect existing tax base, with adverse consequences for all jurisdictions.’

The plan is to develop a co-ordinated set of rules. They would include 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, and 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.

There would also be 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.

This would be subject to a 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 changing domestic law and tax treaties, and would incorporate a co-ordination or ordering rule to avoid the risk of double taxation that might otherwise arise where more than one jurisdiction sought to apply these rules to the same structure or arrangement.

The public consultation focuses on three technical design aspects of the GloBE proposal.

These are the use of financial accounts as a starting point for determining the tax base; the extent to which an multinational can combine income and taxes from different sources in determining the effective (blended) tax rate on such income; and stakeholders’ experience with, and views on, carve-outs and thresholds that may be considered as part of the GloBE proposal.

The deadline for comment is 2 December and they should be sent by e-mail to taxpublicconsultation@oecd.org. A public consultation meeting will be held on 9 December at the OECD in Boulogne-Billancourt.

OECD consultation, Global Anti-Base Erosion Proposal (GloBE) - Pillar Two

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