Tax Readiness: Profit reallocation and a global minimum tax

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January 2020

Overview

The OECD is seeking political agreement in January 2020 among the members of the OECD Inclusive Framework on the basic architecture of proposed global minimum tax and profit reallocation rules so that more detailed technical work on the mechanics of the rules can occur throughout 2020. 

The OECD Secretariat on November 8 published the public consultation document: Global Anti-Base Erosion Proposal (‘GloBE’) (Pillar Two) (‘the Consultation’), which seeks stakeholders’ views on the introduction of common global minimum tax rules across the more than 130 countries participating in the Inclusive Framework. Such rules would operate through top-up taxes and other defensive measures where a multinational group’s income is not considered subject to sufficiently high levels of tax. These rules together with the Pillar One rules are known as the GloBE proposal. See our previous PwC Insight, OECD publishes proposal to rewrite international profit allocation rules, for a discussion on the ‘Unified Approach’ under Pillar One.

PwC on December 17 hosted a webcast featuring PwC specialists who discussed some of these issues. This Insight highlights those discussions. Watch the webcast replay and register for future webcasts in PwC’s Tax Readiness series, which also addresses other important current tax topics.

The takeaway 

While this workstream is being delivered under the OECD’s ‘Tax Challenges Arising from the Digitalisation of the Economy’ project, the impact of the proposals being implemented would extend far beyond highly digitalized businesses; these proposals seek to address more fundamental concerns that the BEPS Project did not provide an adequate solution to the risks of activities and profits being moved to low- (or no) tax jurisdictions. The potential impact should be heeded by all international businesses - including those who do not operate in low-tax jurisdictions and those already subject to US GILTI rules.

Levels of support for Pillar Two appear to be mixed among the Inclusive Framework’s member countries (although with clear support from some key G7 countries). However, there is fairly broad political support for the wider package, and the OECD is working on the basis that both pillars would be agreed together. While some countries are keen to ensure that all income is taxed at a minimum rate, others want to take a broader view that allows countries the flexibility to set lower rates from which groups suffering otherwise higher rates could benefit. Unlike the Pillar One proposals that seek to reallocate tax base between countries, elements of Pillar Two could be implemented by a smaller group of countries.

The rate of tax to which profits in scope must be topped up remains a key challenge for the Inclusive Framework to agree on (as different rates would be expected to bring different regimes within scope), but it is not being addressed as part of the current Consultation. The interaction of the income inclusion rule with the other rules (and all their interactions with the Pillar One proposals) is another key area that will need to be addressed but is not consulted on at this time.

There is significant complexity in each of the Pillar One and Pillar Two proposals, and in their interaction with each other. Taxpayers should analyze the potential impact on their businesses, and the outstanding challenges outlined above, in terms of the impact of both prospective tax liability and increased compliance and filing burden. Given this project’s wide-ranging implications, taxpayers should consider expressing their views to the OECD and national governments in an effort to achieve a stable and sustainable consensus agreement.

Contact us

Doug McHoney

International Tax Services Leader, PwC US

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