The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) has agreed a two-pillar solution

The OECD issued a statement on July 1, 2021. The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) has agreed a two-pillar solution to address the tax challenges arising from the digitalization of the economy.

130 member jurisdictions have agreed to the statement as of July 1, 2021. The statement, which comprises of only five pages, broadly clarifies how Pillar One will be revised (only applicable to MNEs with EUR 20+ billion turnover with a profit margin exceeding 10%), with a comprehensive update on both Pillar One and Pillar Two to follow. Notably, 9 IF member jurisdictions have not (yet) agreed to the revised Pillar One and Pillar Two, 3 of which are EU Member States that have lower statutory tax rates than the agreed Pillar Two rate of at least 15% (Estonia, Hungary and Ireland). In its communication of 18 May, the European Commission indicated that it will propose an EU Directive for the implementation of the OECD Pillar One and Two proposals, once global agreement has been reached to ensure a consistent implementation in all EU Member States (including those that are not OECD-members and do not participate in the Inclusive Framework). Given that EU Directives require unanimous consent, it will be interesting to monitor these dynamics in the coming months.

PILLAR ONE

Amount A:
– Applies to MNEs with EUR 20 billion+ of turnover AND >10% profit margin.
– Revenue threshold to be reduced to EUR 10 billion over time.
– Between 20-30% of residual profit above the 10% profit margin threshold will be re-allocated to market jurisdictions.
– Open for signature in 2022, effective as of 2023.

Nexus:
– Special purpose nexus rule to allocate Amount A to be implemented, subject to local minimum thresholds.

Tax Certainty:
– Mandatory and binding dispute resolution mechanism to be included.

Amount B:
– Final design and quantum of Amount B to be deferred to the end of 2022.

Unilateral DSTs:
– DSTs and similar measures to be rolled back.

Implementation timing:
– To be implemented through a multilateral instrument.
– Should be developed and opened for signature in 2022, with Amount A coming into effect in 2023.

PILLAR TWO

Status:
– IF countries are not required to adopt these rules, but if they do so, they must do it consistent with the agreed approach.
– Similarly, they should accept the application of these rules as applied by other IF countries that did decide to adopt.

Scope:
– Applies to MNEs with EUR 750 million of turnover or more (but countries are free to choose a lower amount)

Tax base:
– Financial accounting income with agreed adjustments, determined on a per jurisdiction basis.

Rate:
– At least 15%.

Carve out:
– Substance based carve out to be introduced based on carrying value of tangible assets, which seems to show similarities to the QBAI exemption in the US GILTI rules

Timing:
– IF countries agreed Pillar Two should be brought into law in 2022, to be effective in 2023.

Click the link below to read the full statement issued by the OECD on July 1, 2021.

➡️ https://bit.ly/3hanRf7