The OECD on November 8, 2019, released its plans for a minimum tax on corporate profits, which is one element of a two-pronged approach to solving the tax challenges arising from the digitalization of the economy.
In May 2019 the Inclusive Framework agreed a Program of Work for Addressing the Tax Challenges of the Digitalization of the Economy. The Program of Work is divided into two pillars:
- Pillar One addresses the allocation of taxing rights between jurisdictions and considers various proposals for new profit allocation and nexus rules;
- Pillar Two (also referred to as the “Global Anti-Base Erosion” or “GloBE” proposal) calls for the development of a co-ordinated set of rules to address ongoing risks from structures that allow MNEs to shift profit to jurisdictions where they are subject to no or very low taxation.
The OECD’s GloBE proposal is designed to give jurisdictions a remedy in cases where income is subject to no or only very low taxation. The proposal looks to minimize tax base erosion and profit shifting by ensuring that income is not inappropriately shifted to territories that levy no or low tax rates, by ensuring that income is subject to at least a minimum level of tax, wherever that may be. This would involve the introduction of a new effective tax rate test, which would also enable stakeholders to better determine in a harmonized way how much tax multinationals pay internationally, the OECD has proposed.
In a new consultation on its proposal, which will run until December 2, 2019, the OECD has explained in detail how its proposed system will work.
According to the OECD, the four component parts of the GloBE proposal are:
- 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;
- 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;
- 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
- 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.
The OECD is proposing that the rules will be implemented by way of changes to domestic law and tax treaties. They would include 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 OECD said: “Like Pillar One, the GloBE proposal under Pillar Two represents a substantial change to the international tax architecture. This Pillar seeks to comprehensively address remaining BEPS 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 shifting and establishes a floor for tax competition among jurisdictions. In doing so, the GloBE proposal is intended to address the remaining BEPS challenges linked to the digitalization of the economy, but it goes even further and addresses these challenges more broadly. The GloBE proposal is expected to affect the behavior 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.”
The OECD added: “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 coordinated 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 GloBE proposal should be designed to achieve these objectives consistent with principles of design simplicity that will minimize compliance and administration costs and the risk of double taxation. To that end, the Program of Work calls for the consideration of simplifications, thresholds, carve-outs, and exclusions from the rules.”
The OECD intends that the GloBE proposal will operate as a top-up to an agreed fixed rate. The actual rate of tax to be applied under the GloBE proposal will be discussed once other key design elements of the proposal are fully developed, it said.
The consultation is seeking feedback on:
- The use of financial accounts as a starting point for the tax base determination, as well as different mechanisms to address timing differences;
- The level of blending under the GloBE proposal – that is the extent to which an MNE can combine high-tax and low-tax income from different sources taking into account the relevant taxes on such income in determining the effective (blended) tax rate on such income; and
- Experience with, and views on, carve-outs and thresholds considered as part of the GloBE proposal.