By 14 December 2020, the OECD received hundreds of submissions with over 3’500 pages of input from a variety of interested stakeholders to the Pillar I and II blueprint proposals. During the public hearing on 14 and 15 January 2021 it was made clear that coming up with new global taxing proposals is the OECD’s clear top priority project (despite COVID-19).
Some aspects and outcomes from both the consultation inputs and last week’s public consultation hearings are summarised hereafter:
- Views are very diverging depending on the stakeholders concerned. There seems to be broadly consensus though that a global (rather than unilateral) solution is needed.
- NGO representatives for example pointed out that highly digitalised businesses are the clear winners in the current pandemic situation and that a change is required as these players are currently heavily undertaxed in their view. Also, they request the global minimum tax rate to be set at a level of between 20 % to 25 %.
- It's acknowledged, even by the OECD, that the rules as proposed are technically complex and further simplification is needed. Whilst many aspects are still to be refined by the OECD, the devil lies in the detail. Views on how to simplify various technical elements diverge.
- There is a big concern by businesses, that the complexity of the proposed rules will trigger a huge and unreasonable additional administrative compliance effort.
- Hence, there is strong need for making the proposed rules simpler and more practical to handle. Several proposals have been put forward in that regard.
- Businesses are also very concerned about the potential of the new rules to trigger a disproportionate high risk of double taxation and international tax disputes. As such, enhanced mechanisms to secure more advance certainty are asked for.
- The OECD has reiterated its objective to deliver a final proposal by mid-2021 based on which then the political variables can be negotiated among the approx. 130 countries participating in the Inclusive Framework (IF).
- Key variables to politically agree include the size of revenue of multinational companies in scope (expected to be at least EUR 750 million, potentially with some higher global revenue threshold in initial years), group profitability thresholds to determine Amount A, magnitude of Amount B, definition of the global minimum tax rate, priority of the income inclusion rule over the subject to tax rule or vice versa etc.
Concerning the developments ahead, a lot will depend on how the new US Administration under President Biden will position itself. The position of the US may become clearer at the next G20 meeting scheduled at the end of February. The US under President Trump paused discussions with the OECD on Pillar I. Irrespective of the administration, the US may not view itself as a winner of the new proposals. This might lead to a potential split of the two Pillars. To avoid further delay, the OECD may start to press for accelerated implementation of the global minimum tax proposal under Pillar II first.
Assuming that the project will further progress and at some stage countries will be forced to implement the new rules, the Swiss Federal Council has tasked a small expert group to explore best ways to manoeuvre to secure tax revenue for Switzerland and to analyse which Swiss tax law provisions should be changed. Regarding Pillar II, this may include rules allowing multinational companies to opt to pay the additional top-up tax in Switzerland and thereby avoid redistribution of such tax revenue to other jurisdictions.
Key takeaways
- The project will continue at the technical level to fine tune the proposed rules.
- The OECD will try to build in certain simplifications and try to improve practicality and administrability.
- Nevertheless, it must be expected that even after such attempt to reduce complexity, the rules will remain highly technical and complex, and accordingly demanding to understand and ultimately to apply.
- The mechanics of the rules will be subject to political discussions by the IF countries concerning the desired quantum of reallocation of tax revenues and agreeing the various thresholds and rates.
- There is political pressure on the OECD to progress and bring the project to a timely conclusion. The stance of the new US administration is to be monitored but may have the impact that Pillar II will be prioritized / implemented prior to Pillar I.
- As the technical rules are being further clarified by the OECD, companies are advised to familiarise themselves on the potential impact the new rules will have on them.
- Also, tax functions may want to educate internal stakeholders at senior management level accordingly.
- In parallel, Switzerland must get prepared for a next corporate tax reform which may in its own interest need to be implemented swiftly as to avoid undue loss of tax revenues that may otherwise result from the faster implementation of the new rules by other jurisdictions.
