On November 8, 2019, the OECD published for public consultation a document with the proposal on the anti-abuse rule and the establishment of a global minimum taxation, known by the acronym GloBE (Global-Anti Base Erosion Rule), in the framework of the so-called Pillar Two. The OECD hopes this new document will represent a step forward in the search for international consensus in order to provide an answer to the current challenges posed by the digitalisation and globalisation of the economy.
It is worth to briefly recall that the OECD is working in order to reach a political agreement among the countries member of the Inclusive Framework on the development of measures to solve the outstanding issues of BEPS actions, in particular Action 1, and to settle the tax challenges arising from the digitalisation and globalisation of the economy. For this purpose, in January 2019, the OECD published a policy statement and a document for public consultation which included a proposal whereby all measures to be agreed on should be grouped in two categories (Pillar One and Pillar Two).
In the development of Pillar One during October 2019, the OECD released for public consultation the measures of the "Unified Approach" (analysed in our October newsletter) which proposes the redefinition of the nexus rules and a new distribution of taxation rights. In the proposed approach, the OECD moves away from traditional concepts of international taxation based on the existence of physical presence in order to grant taxation rights mainly to countries where users are located. The practical application of this new approach would primarily affect highly digitalised sectors, as these sectors can access market jurisdictions with little physical presence.
On 8 November 2019, the OECD published for public consultation the document with the proposals for Pillar Two. In this document, the OECD's starting point is that setting rules for the establishment of a global minimum taxation on corporate income would help reducing tax competition between jurisdictions and prevent large groups from organising themselves on the basis of the tax advantages offered by each state. It also proposes a global rule to ensure that the profits of multinational companies are subject to a minimum tax threshold.
However, the proposal of the Global-Anti Base Erosion Rule (GloBE) does not address a fundamental aspect: the actual minimum percentage level of taxation which would be considered acceptable. It does nevertheless indicate that this minimum taxation threshold should be understood to refer to effective taxation.
The global rule sets out four specific measures, which should be implemented in an order of strict priority so as to reduce the risk of double taxation. The specific measures included in the document are as follows:
- Income inclusion rule
Under this rule, the income of foreign subsidiaries or foreign branches would be subject to tax provided, in the country of residence, such income has been subject to taxation at an effective tax rate that is below the minimum rate considered acceptable.
- Undertaxed payments rule
This rule provides for the non-deductibility or the even the taxation at source of payments made to related parties where the income would not be subject to tax above the minimum acceptable rate in the country of residence.
- Switch-over rule
Under this rule, switch-over clauses would be included in double taxation treaties, so as to allow the country of residence not to apply the exemption method. Instead, the deduction method should be applied in those cases where profits attributable to a permanent establishment (PE) or income derived from immovable property obtained without PE are subject to taxation below the agreed minimum at source.
- Subject to tax rule
Finally, this rule, which would complement the rule above, would allow the source state to impose withholding or any other tax and to refuse the benefits of the double taxation convention when the income is not subject to taxation at the minimum acceptable rate in the state of residence.
The document itself acknowledges that the practical application of the proposed rules poses technical difficulties. For the time being, however, the OECD is focusing on the development of the first income inclusion rule. In relation to this, the OECD raises three essential aspects for consultation:
I. The calculation of the taxable base or starting point to determine the tax rate actually borne by the taxpayer. In this context, the OECD suggests referring to financial statements as the basis to facilitate tax rate calculation, although the OECD does note that rules to harmonize these financial statements will be needed.
II. The assessment of whether the entity is above the required level of minimum (blending). In other words, whether consolidation of results should somehow be allowed and, if so, whether such consolidation should be permitted by combining:
- The various benefits obtained by the same entity, allowing mixing benefits subject to a high taxation with others subject to a lower taxation.
- The aggregated profits obtained by the different entities belonging to the same group in each jurisdiction.
III. Finally, the OECD consults whether other methods should be established to exclude or limit the application of the proposed rule, taking into consideration specific sectors or regimes. The OECD does not, however, suggest which of them should be excluded.
The practical application of these rules would require amendments to national legislation and double taxation treaties and would imply significant changes in international tax rules currently applied by multinational companies.
It is interesting to highlight two aspects of the proposals of this Pillar Two. Firstly, its application would transcend the field of digital business; and secondly, an anti-abuse rule is put forward which does not require the existence of abuse to apply. On the contrary, the existence of abuse would be established based on objective parameters.
Finally, it should be noted that despite the apparent political consensus on the measures proposed in the two pillars, the high technical complexity of their implementation implies that, in practice, the changes still seem far. However, the OECD intends to obtain a political agreement on them during January 2020 in order to work on the technical configuration and design of the measures during the year 2020.