I may have previously complained about the stream of consultations on different aspects of the OECD's international tax reform project, but now, in the face of the back-and-forth of UK domestic tax policy, I almost find myself taking solace in its steady progression.
Following the agreement in principle a year ago now, many difficult issues have been consulted on, some have been agreed, but many others are still pending. Progress has undoubtedly been made, but not as fast as initially envisaged due to the complexity of the task, and the practicalities of implementation.
As with the UK’s government, there will also be changes in key personnel for the OECD. After many years at the helm, Pascal Saint-Amans hands over at the end of October to his deputy, Grace Perez-Navarro, who is also leaving the OECD next March. But unlike the UK’s government changes, this handover has been very smoothly managed and the OECD remains committed to facilitating the implementation of the agreed measures. The implementation phase is expected to last ten years.
Pillar One (includes “Amount A”, the reallocation to market jurisdictions of some of the largest multinationals’ profits)
For the largest, most profitable multinationals, Amount A, of Pillar One requires a lot of work to determine where tax is paid and how much. Amount A will be implemented with a multilateral convention ("MLC") which is currently under discussion and is expected to be finalised in March/April for signing in June/July 2023. It will take effect from 2024 once a critical mass of jurisdictions as defined by the MLC have ratified it.
Progress on Amount A continues steadily in the form of consultations on the separate building blocks. The consultation on revenue sourcing rules/tax base/marketing and distribution safe harbour has now closed and the OECD is considering the comments to be fed into the MLC. The consultation on administration and tax certainty will close on 11 November 2022. A consultation is expected by the end of 2022 on another crucial part of the package, the withdrawal and standstill of DSTs and similar measures.
A consultation on the application of simplified transfer pricing rules to in-country baseline marketing and distribution activities (“Amount B”) is expected by the end of 2022 with work on Amount B to be completed in the first half of 2023.
It is not possible for the current US legislature to pass legislation to implement international tax reform. But will Pillar One go ahead for everyone else without the US? I think the answer to this question will depend in part on what is agreed on the withdrawal and standstill of DSTs and similar measures and whether there is confidence that even if the US does not implement Pillar One at the same time as others, it will eventually implement it.
Pillar Two (includes the global minimum corporate tax)
In a previous blog, Tom Gilliver and I wrote about how the UK was ahead of the game on the implementation of Pillar Two. After a consultation earlier this year on draft legislation for the UK’s multinational top-up tax, and several working group meetings with HMRC taking place over the summer to progress the draft legislation, legislation was expected to be included in the Finance Bill this Autumn, but for political reasons the Finance Bill has been delayed until Spring 2023. This may actually work out better for the Pillar Two legislation as it gives a bit more time to let discussions around the application of the model rules play out at the OECD level before the UK legislation is finalised. The draft legislation provides for the multinational top-up tax to apply effectively from 2024 but it is important for competitiveness that the UK ensures that it is among a first-mover group rather than being the lone first-mover. So we may well see a delay in the implementing legislation or a later effective date depending on what stage other jurisdictions have reached by the time the UK’s legislation is enacted.
Plans for an EU Directive to implement Pillar Two across the EU are currently stalled by Hungary refusing to agree to it. The European Commission is considering ways to bring in the measure without unanimity although there is still hope that Hungary may be persuaded to agree at one of the next ECOFIN meetings.
Discussions continue about how Pillar Two interacts with US GILTI. As changes to GILTI to bring it into line with the income inclusion rule did not make it into the recent Inflation Reduction Act, GILTI will not qualify as an income inclusion rule. The approach to the co-existence of an un-amended GILTI regime and Pillar Two depends on whether GILTI counts as a CFC charge (to be attributed to foreign subsidiaries) or not. If it does count as a CFC charge, the next question is how it would be attributed, given it is charged on an aggregate basis rather than jurisdiction by jurisdiction. This involves difficult technical questions (e.g. because where the US sees one CFC, there may actually be several underlying companies that were checked into it) and there are several different measures that could be used as attribution keys.
The impact of the US’s new minimum tax also raises tricky questions: where it gives rise to a charge on foreign entities, is it a CFC charge (meaning that the US would have three different CFC charges)? Where it is applied to US entities, is it a domestic minimum tax? There is a lot to work through here.
Next year should see the signing of the MLC to implement Amount A of Pillar One and further progress on the implementation of Pillar Two in various jurisdictions and the EU. GloBE Administrative guidance will be published to supplement the commentary on the GloBE model rules where unclear. Guidance on priority matters such as the application of the transition rules is expected in 2022 with further guidance following from 2023 onwards.
In the meantime, an OECD report published on 6 October suggests that governments should review their incentives to see which taxpayers benefit from different incentives and how different taxpayers/incentives will be affected by the GloBE rules. Something else for the UK government to build into their tax policy decisions!