Following the publication by the OECD Secretariat of two blueprints on the architecture of BEPS 2.0 and a public consultation at the end of last year, all eyes were turned towards the incoming Biden administration to gauge the chances of a multilateral deal on international taxation to be reached by the extended deadline of July 2021.
In February, US Treasury Secretary Yellen announced that the US would no longer advocate for an implementation of Pillar One as a ‘safe harbor’. The safe harbor proposal by the Trump administration, a major hurdle in the negotiations towards a compromise, would have allowed companies to choose whether to opt into Pillar One in exchange of receiving certain guarantees such as avoiding unilateral digital tax measures.
While this move signalled the willingness on the part of the US to get back to the negotiating table, the key overture took place at the beginning of April with widely publicised US proposals outlined in a leaked US Treasury presentation circulated with 135 countries and drawing on the OECD’s Pillar One and Pillar Two blueprints. Those proposals should be considered in the context of wider US tax reforms – the ‘Made in America Tax Plan’ (the ‘Plan’) – as well as the proliferation of unilateral digital taxes.
US proposals on global minimum tax (Pillar Two)
The Plan envisages to increase the US corporate income tax rate to finance large infrastructure investments in the US. In order to sustain the competitiveness of US multinational companies and prevent future so-called ‘inversions’ (i.e. US groups moving their global headquarters abroad, often through mergers), a key building block of the Plan includes replacing the existing Global Intangible Low-Taxed Income (‘GILTI’) regime by the proposed Pillar Two of BEPS 2.0.
Unlike GILTI, Pillar Two would set a global minimum effective tax rate (‘ETR’) for multinational companies calculated on a country-by-country basis. From a US perspective, the new rule would allow the Internal Revenue Service (‘IRS’) to tax (at the level of the US ultimate parent) any profits of foreign subsidiaries until the average ETR per foreign jurisdiction reaches the minimum rate. Importantly, the US originally proposed to set this minimum rate at 21%, later indicating that it would accept reducing it to 15%. This is still higher than the headline tax rates of countries such as Ireland, Switzerland (in most cantons) and many others. This ambitious target may not reach a consensus but creates additional pressure on low tax jurisdictions and may lead to an agreement on a rate higher than the 10% to 12.5% previously anticipated by many observers.
US proposals on a new taxing right (Pillar One)
The US also recognised that another key objective of BEPS 2.0 is to prevent the levy of unilateral digital taxes through a multilateral deal on Pillar One. As envisaged in the blueprint, Pillar One would create a new taxing right for large companies based on sales in a territory, independently of any physical presence in that jurisdiction. With the US hosting some of the largest and most profitable digital companies, this first pillar has been the most contentious and raised concerns of discriminations against some of the most innovative US companies.
The US proposal on Pillar One aims at simplifying the design and application of the measure by:
- removing any industry carve-outs to extend the scope beyond digital services and consumer-facing businesses, and
- setting a high revenue and profitability threshold to capture up to 100 of the largest and most profitable companies only.
Key takeaways
- The political announcements made by the Biden administration are creating significant momentum and increasing the chances of a global deal on both pillars of BEPS 2.0 by the July 2021 deadline.
- Important technical details remain to be crafted by the OECD Secretariat, but the US proposals are a push towards a simplification of the measures on Pillar One.
- Nevertheless, the stakes are high and the mechanics of the rules are likely to remain complex. As such, companies should evaluate the potential impacts on their operations.
- Even if a higher threshold for Pillar One would result in only a handful of Swiss companies being captured by the rules, this may be lowered in the future once stable processes have been designed by tax administrations for the 100 largest and most profitable companies.
- A minimum ETR of 21% proposed by the US for Pillar Two would have significant consequences for Switzerland’s competitiveness in the international arena.
