OECD plans transition to global minimum tax

The Organization for Economic Cooperation and Development is making plans for easing multinational companies and government tax authorities into its plans for a global minimum tax.

Last Thursday, the OECD held a public consultation meeting on compliance and the tax certainty aspects of the global minimum tax. The OECD unveiled technical guidance last month for its far-reaching reform of the global tax system in which multinational companies would be subject to a minimum tax of 15% on their profits (see story). OECD officials discussed some of the ramifications during the meeting. The guidance includes a number of safe harbors on country-by-country reporting and forms of transition relief that should ease the pain of the transition in the so-called Pillar Two framework for a global minimum tax (Pillar One applies to the ability of a country to tax profits from foreign companies that sell into their country but don’t have a physical presence there).

“At last count, we have over 40 countries that are now building the pillars around the world,” said Achim Pross, deputy director of the OECD Center for Tax Policy and Administration. 

For a number of businesses that OECD officials have spoken with, the safe harbors and transition relief will mean that up to 90% of the countries in which they operate during the transition period won’t have to make a full calculation of their effective tax rate. They are turning their focus toward working on a “sensible” form of tax administration on the tax return, with simplifications that can be made without undermining the tax policy objective.

“We have heard many of the business comments on the return,” said Pross. “They’re very critical, but constructive, and that’s the dialogue that we need.”

Among the points of discussion were which data points are necessary to calculate the “top-up tax,” which would be imposed when a company is paying insufficient taxes to a particular jurisdiction under the global minimum rules.

While the Biden administration is in favor of a 15% global minimum tax, and Treasury Secretary Janet Yellen’s support for it helped spur an agreement for it in the OECD, it is facing an uphill climb in Congress. The Biden administration and Democrats in Congress were able to pass a form of it in the Inflation Reduction Act last year, but it isn’t the same as the one in the OECD (see story). The transition relief and safe harbors may be needed for U.S. companies to be able to transition to it, but congressional Republicans are indicating their opposition to imposing it in the U.S. Yellen faced questioning over the OECD minimum tax from lawmakers during oversight hearings this month on the tax provisions in President Biden’s budget plan.

“For the last two years, Treasury has used the OECD negotiations to attempt to compel changes in U.S. law without regard for the effect on U.S. revenue, U.S. companies and U.S. workers,” said Sen. Mike Crapo, R-Idaho, ranking member of the Senate Finance Committee, during an opening statement at a hearing last Thursday. “Not only has the administration failed to put a stop to digital services taxes, but now foreign countries threaten to impose extraterritorial taxes on U.S. companies under the global minimum tax — at Treasury’s invitation. The latest OECD guidance confirms the administration has agreed to allow foreign countries to collect U.S. GILTI revenue, and worse, tax U.S. companies on their U.S. profits in violation of our tax treaties. The budget fails to consider these revenue impacts, which, if implemented, will result in billions of dollars of lost U.S. revenue.”

Yellen faced similar questions during a House Ways and Means Committee hearing earlier in the month when she was accused of not keeping members of Congress apprised of developments at the OECD. She defended her openness. “Our staff has had numerous briefings with this committee,” she said. “I have had many conversations with the chair and ranking member of this committee on ongoing developments whenever something new occurs during the negotiations.” She argued that Pillar Two concedes no taxing rights and is an international agreement. The main purpose is to stop other countries from functioning like tax havens.

The OECD framework includes not only the global minimum tax, but includes provisions to address the rise of digital services taxes as a way to tax revenue from technology companies that can easily sell across borders and locate their tax domiciles in low-tax countries.

“This is creating a global tax code that allows us ultimately to move from a very traditional, brick and mortar type tax code into a digital code, really acknowledging the way that organizations and companies make money today and how they reach customers and ultimately how they grow their businesses,” said Marna Ricker, EY’s global vice chair of tax. “It’s a really important moment for that reason. We have a 100-year-old plus traditional tax code, and it needs to modernize to a digital economy.”

She sees developments happening now not only in the U.S., but abroad when it comes to preparing for the OECD rules. “On the Pillar Two side, we have really significant activity and statements certainly coming out of the EU,” said Ricker. “We have countries already moving forward with proposed legislation, or at least putting out a point of view about how and when they intend to bring that into their budgeting process, and their policy process.”

She pointed to South Korea moving at the end of the last year, and Japan, Singapore, South Africa, the U.K. and Qatar putting out proposals and legislation in their countries, or to state when they will pick up the rules, and what their point of view is on them. 

“Those are all different,” Ricker noted. “If you look at each one of those, they’re unique, and I think that will be the trick, to make sure that this is a multilateral coordination for U.S. multinationals and how they’ll navigate that. There’s definitely risk there in double taxation and in controversy. There’s likely also higher potential taxes.”

The OECD issued revised guidance on the revenue it predicted would be generated from Pillar One and Pillar Two. “It was significantly larger,” said Ricker. “For Pillar Two, it went from $150 billion to $220 billion as an estimate, in terms of the shifting rate that the global revenue gains. And then on Pillar One, even bigger numbers: It went from an estimate of a range of $13 billion to $36 billion to start, but it jumped to $200 billion.”

Multinationals will have to understand how different countries will be applying the rules from the OECD when it comes to base erosion and profit shifting. “That is the challenge for large corporations everywhere to understand what each of those pieces of legislation says, and then how they conform to the guidance that’s been given by the OECD,” said Ricker. “There will be a peer review so countries will be reviewing countries to make sure that they’re BEPS compliant.”

As for the U.S., it’s hard to predict what tax laws can be passed in a nearly evenly divided Congress, and how those could affect the Global Intangible Low-Taxed Income rules from the Tax Cuts and Jobs Act of 2017 and the corporate minimum tax rules from the Inflation Reduction Act last year. But Congress will need to decide what to do about all the temporary TCJA provisions that expire in 2025, although many of the corporate tax provisions were made “permanent” back in 2017.

“We have the U.S. GILTI and the corporate alternative minimum tax,” said Ricker. “The OECD would say they are not Pillar Two compliant. In that fact pattern, you’re dealing with two regimes. You’re dealing with the U.S. regime on GILTI and the corporate alternative minimum tax, and then you’re dealing with what everybody else’s regime looks like that’s OECD compliant. It’s a high level of complexity to navigate, and a lot of work and analysis to be done. You’re doing two tax corporate income tax calculations. I don’t necessarily see this resolving itself anytime soon. We’ve got really significant TCJA provisions that are expiring in 2025. That is when I would expect really significant U.S. tax legislation, the end of 2025. That is the point at which I think GILTI and corporate alternative minimum tax will need to be addressed because we have this cliff that comes in those expiring provisions. 2025 is going to be exciting.”