On 8 November 2019, the Organisation of Economic Cooperation and Development ("OECD") published a public consultation document asking for comments on its Global Anti-Base Erosion ("GloBE") Pillar II proposal. This follows the publication of the OECD Secretariat’s "Unified Approach" under Pillar I.
According to the OECD, the objective of GloBE Pillar II is to address ongoing risks from structures that allow Multinational Enterprises ("MNEs") to shift profit to jurisdictions where they are subject to no or very low taxation. To do so, the proposal presents a significant departure from the traditional principles of international taxation.
In terms of substantive scope, the proposal is aimed at MNEs but is not limited to any particular sector (such as the digital economy) and does not, for now, include any turnover thresholds. Its impact therefore, if implemented, could be far-reaching for taxpayers operating in multiple jurisdictions.
In essence, GloBE is intended to operate as a top-up to an agreed minimum rate of tax. In this sense, it may draw comparisons with the US GILTI regime. GloBE consists of four components:
- An income inclusion rule that would tax the income of a foreign branch or controlled entity if that income was subject to tax at an effective rate that is below a minimum rate (akin to CFC-rules);
- An undertaxed payments rule that would operate by way of a denial of a deduction or imposition of sourced-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;
- A switch over rule to be introduced into tax treaties that would permit the residency jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment or derived from immovable property (taxable in the source jurisdiction) are subject to an effective rate below the minimum rate; and
- A subject to tax rule, that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.
At this stage, the public consultation seeks to take the work forward on technical aspects necessary to agree on this minimum rate of tax: (i) how to determine the tax base and in particular the feasibility of using financial accounts as a starting point, (ii) the blending of low and high-tax income to determine the effective tax rate ("ERT") the MNE is subject to, and (iii) carve-outs as well as thresholds. The proposal remains silent on what would be the agreed minimum rate.
The OECD wishes to develop a solution for its final report which will be submitted to the G20 in 2020. While the proposal remains a secretariat proposal at this stage, it is worth noting that the US Treasury Secretary expressed full support for a GILTI like Pillar II solution in a letter dated 3 December 2019.
OECD Releases its "Global Anti-Base Erosion" Proposal (Pillar II)
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ARTICLE24 January 2020