The OECD has now two proposals in process: Pillar One addresses the digital economy and Pillar Two sets forth a global minimum tax system; global anti-base erosion (GloBE) proposal. The proposals are linked herein for reference.
Both proposals may have one or more legal entities of a multinational taxed on more than one approach, whether they have a digital business segment, and also dependent on the countries where it is taxed notwithstanding the type of business it operates.
This represents a new era of BEPS, and one that demands attention to as the proposals move forward.
Pillar One summary
- Scope. The approach covers highly digital business models but goes wider – broadly focusing on consumer-facing businesses with further work to be carried out on scope and carve-outs. Extractive industries are assumed to be out of the scope.
- New Nexus. For businesses within the scope, it creates a new nexus, not dependent on physical presence but largely based on sales. The new nexus could have thresholds including country specific sales thresholds calibrated to ensure that jurisdictions with smaller economies can also benefit. It would be designed as a new self-standing treaty provision.
- New Profit Allocation Rule going beyond the Arm’s Length Principle. It creates a new profit allocation rule applicable to taxpayers within the scope, and irrespective of whether they have an in-country marketing or distribution presence (permanent establishment or separate subsidiary) or sell via unrelated distributors. At the same time, the approach largely retains the current transfer pricing rules based on the arm’s length principle but complements them with formula based solutions in areas where tensions in the current system are the highest.
- Increased Tax Certainty delivered via a Three Tier Mechanism. The approach increases tax certainty for taxpayers and tax administrations and consists of a three tier profit allocation mechanism, as follows:
- ‒ Amount A – a share of deemed residual profit6 allocated to market jurisdictions using a formulaic approach, i.e. the new taxing right
- ‒ Amount B – a fixed remuneration for baseline marketing and distribution functions that take place in the market jurisdiction; and
- ‒ Amount C – binding and effective dispute prevention and resolution mechanisms relating to all elements of the proposal, including any additional profit where in-country functions exceed the baseline activity compensated under Amount B.
Pillar Two Summary
Under Pillar Two, the Members of the Inclusive Framework have agreed to explore an approach that leaves jurisdictions free to determine their own tax system, including whether they have a corporate income tax and where they set their tax rates, but considers the right of other jurisdictions to apply the rules explored further below where income is taxed at an effective rate below a minimum rate. Within this context, and on a without prejudice basis, the members of the Inclusive Framework have agreed a programme of work that contains exploration of an inclusion rule, a switch over rule, an undertaxed payment rule, and a subject to tax rule. They have further agreed to explore, as part of this programme of work, issues related to rule co-ordination, simplification, thresholds, compatibility with international obligations and any other issues that may emerge in the course of the work.
Members of the Inclusive Framework agree that any rules developed under this Pillar should not result in taxation where there is no economic profit nor should they result in double taxation.
This part sets out the global anti-base erosion (GloBE) proposal which seeks to address remaining BEPS risk of profit shifting to entities subject to no or very low taxation It first provides background including the proposed rationale for the proposal and then summarises the mechanics of the proposed rules together with a summary of the issues that will be explored as part of the programme of work.
While the measures set out in the BEPS package have further aligned taxation with value creation and closed gaps in the international tax architecture that allowed for double non-taxation, certain members of the Inclusive Framework consider that these measures do not yet provide a comprehensive solution to the risk that continues to arise from structures that shift profit to entities subject to no or very low taxation. These members are of the view that profit shifting is particularly acute in connection with profits relating to intangibles, prevalent in the digital economy, but also in a broader context; for instance group entities that are financed with equity capital and generate profits, from intra-group financing or similar activities, that are subject to no or low taxes in the jurisdictions where those entities are established.
Final and proposed Foreign Tax Credit (FTC) regulations are in review by OMB’s Office of Information and Regulatory Affairs.
These regulations join the pending BEAT regulations in OIRA.
We should expect both sets of regulations in the very near future.
The Platform for Collaboration on Tax – a joint initiative of the IMF, OECD, UN and World Bank Group – has undertaken, at the request of the G20, the development of a series of “Toolkits” to help guide developing countries in the implementation of policy options for issues in international taxation of greatest relevance to these countries.
This toolkit, in draft version, is intended to provide an analysis of policy options and a “source book” of guidance and examples to assist low capacity countries in implementing efficient and effective transfer pricing documentation regimes.
This first part of the Toolkit provides information on the background, context and objectives of transfer pricing documentation regimes.
Part II then discusses a number of general policy options and legislative approaches relevant to all types of documentation requirements.
PART II. OPTIONS FOR COUNTRIES TO IMPLEMENT TRANSFER PRICING DOCUMENTATION
This section discusses various policy considerations and options relevant to designing a regime for transfer pricing documentation. These include:
- The regulatory framework, through a combination of primary legislation, secondary legislation and guidance;
- Confidentiality of taxpayers’ documentation and information;
- Timing issues concerning when documentation must be in place and when it is required to be submitted to the tax administration;
- Enforcement, including penalties and measures to assist and promote voluntary compliance;
- Dealing with access to information outside the jurisdiction; and
- Simplification and exemptions.
Part III focuses more specifically at each kind of documentation in turn, and examines the specific policy choices that are relevant to each, as well as providing a number of examples of country practices.
The final part sets out a number of conclusions.
As news of final Base Erosion and Anti-abuse Tax (BEAT) regulations are to be released by OIRA and issued, there are also new proposed BEAT regulations to accompany them.
So, the BEAT goes on, while everyone is still awaiting final foreign tax credit regulations.
As we are approaching the end of the third quarter, this may be a significant development to digest for material changes to the proposed regulations, in addition to some unknowns and uncertainties.
As 2019 year-end is quickly approaching, there are important items of legislation still pending, including the following:
- US Tax Act (TCJA) technical corrections, including the ability to apply transition tax overpayments (several Republicans and Democrats have already agreed to sponsor a relevant bill), and CFC downward attribution rules
- Tax extenders, including the important look-through rules for CFC’s, which expires at the end of this year
- Additional tax treaties will be reviewed, following the recent ratification of Spain and Japan treaties with the US
- Final BEAT regulations, with new proposed regulations in some areas
- Section 163(j) rules for application to CFC’s
- GILTI high-tax exclusions
- Final foreign tax credit regulations
- Section 245A dividends received deduction regulations
- FDII and anti-hybrid regulations
The above items are important as stand-alone items, and represent a significant amount of regulations to absorb prior to year-end if they can be issued this year.
These changes may significantly impact the annual ETR of multinationals in the fourth quarter, as well as introduce new TCJA concepts into treaties and complex Limitation of Benefit (LOB) clauses therein.
The TCJA complexities, and interpretations thereto, continue this year and next, posing compliance and planning uncertainties going forward.
EY’s Global Tax Alert provided additional details, as referenced.
The US tax treaty protocols will enter into force between US and the countries of Japan and Spain.
The Japanese protocol will have effect for withholding taxes (e.g., related to dividends and interest) for amounts paid or credited on or after the first day of the third month following the date on which the protocol enters into force — that is, 1 November 2019. For all other taxes, the Japanese Protocol will apply to tax years beginning on or after 1 January 2020.
For withholding taxes, the Spanish protocol generally will apply to amounts paid or credited on or after 27 November 2019, the date on which the protocol enters into force. For taxes determined by reference to a tax period, the protocol will apply for tax years beginning on or after 27 November 2019 (e.g., 1 January 2020, for calendar-year taxpayers). In all other cases, the protocol will apply on or after 27 November 2019.
The key features of the protocols are detailed in the EY Global Tax Alert, as reference. For the Spanish protocol, the new limitation on benefits requirements must be met timely for treaty-based withholding rates to apply.