The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, or BEPS, is making strong progress with ongoing reforms of the international tax system, according to the OECD secretary-general's latest tax report to G20 finance ministers and central bank governors.
The report highlights the historic milestone reached in July by 138 countries and jurisdictions who agreed an outcome statement summarizing the package of deliverables developed by the inclusive framework on the remaining elements of the "Two-Pillar Solution to Address the Tax Challenges arising from the Digitalisation of the Economy."
These include a framework for the simplified and streamlined application of transfer pricing rules to certain marketing and distribution activities (Amount B of Pillar One) and a subject-to-tax rule that will enable developing countries to update bilateral tax treaties to "tax back" in respect of certain intra-group income where such income is subject to low or no nominal taxation in the other jurisdiction.
The report also highlights progress on tax and development initiatives and the tax transparency agenda. Building on a 2022 report, the "G20/OECD Roadmap on Developing Countries and International Taxation Update 2023" sets out indicative targets and outlines the range of specific initiatives that are planned to accelerate progress in areas identified by developing countries as key priorities.
Finally, the report includes new analysis on enhancing international tax transparency on real estate, unleashing the potential of automatic exchange of information for developing countries, and facilitating the use of tax-treaty-exchanged information for certain nontax purposes.
As part of the ongoing work under Pillar Two, the inclusive framework has issued a package of documents consisting of the "
"Pillar Two comes out of the OECD profit-sharing work, what we know as 1.0," said Adam Tritabaugh, a partner in the international tax group of Top 10 Firm RSM US. "In its simplest form, that's what the goal of Pillar Two is — getting to a minimum tax on a global basis."
Pillar Two has certainly shaped things over the past number of years, he observed: "Now it is kind of BEPS 2.0, where there's Pillar One, which is really geared towards digital taxes on a global basis, and implementing some kind of system that allocates profits for digital companies that sell digital goods."
"Pillar One, the revenue threshold, is about $20 billion of revenue, so it's not that broadly applicable," he said. "The number of companies to which it will apply is less than 200, but Pillar Two, the global minimum tax piece, has far more wide-reaching consequences. That will apply to companies with an average revenue of $750 million, which doesn't take a whole lot to achieve. And that's on a look-back basis, so you have two out of the last four years as a test to have done that, but it's a lot wider reach than Pillar One. This is why Pillar Two is getting a lot of attention. It's a global minimum tax computed on a jurisdictional basis, so the framework that the OECD has come out with is designed to assure that taxpayers are paying a minimum 15% tax in each jurisdiction in which they operate."
The OECD has come out with a number of different kinds of tranches of technical guidance, according to Tritabaugh: "They're saying, 'This is what we intend Pillar Two to be,' but ultimately the OECD doesn't have the rights to set tax law across the globe."
For countries that have signed up to support Pillar Two — over 130 of them, at last count — the OECD just puts out the technical framework. Countries will follow as they implement a minimum tax in their own, local tax. And as they work through that framework, the OECD keeps coming out with more information.
Tritabaugh says that ultimately there are three different taxing systems that are proposed in the framework:
1. A qualified domestic minimum top-up tax. If a company in a jurisdiction is not paying at least the 15% minimum tax, the jurisdiction would have the right to top it up and get it to 15%. That happens down at the individual jurisdictional level.
2. An income inclusion rule, which applies more at a parent company level. "You're either a direct parent or an indirect parent company," explained Tritabaugh. "You're aware of the various jurisdictions down below that do not have a domestic minimum top-up tax applying to the parent company. This income inclusion rule would allow the parent to say, 'You didn't get to the 15% down at your lower subsidiary level, so we have the right to top up at our parent level because we're either the ultimate parent or an intermediate parent. So that's kind of the second layer of potential tax."
3. Undertaxed profits. "The third layer is an undertaxed profits rule that can allocate out your tax that still falls below the minimum tax allocated out among the groups and have various jurisdictions apply some additional tax," he said.
But each of these sets of rules is something that OECD proposed, and it's up to each jurisdiction to actually pass tax law, to conform with the framework, Tritabaugh emphasized.
