OECD releases guidance on global minimum tax

The Organization for Economic Cooperation and Development unveiled technical guidance 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.

The OECD and the G20 agreed on a so-called Pillar Two framework in 2021 for imposing a 15% minimum tax on multinationals as a way to deter them from moving their profits to low-tax countries, part of the OECD’s Base Erosion and Profit-Shifting initiative, also known as OECD BEPS. So far, 138 jurisdictions have agreed to the framework, including the U.S. Treasury Department.

Congressional Republicans have remained opposed to it, although a different form of a 15% minimum tax was included in last year’s Inflation Reduction Act, which was passed by Democrats along party lines. It amended some provisions of the Tax Cuts and Jobs Act of 2017, including the Global Intangible Low-Taxed Income, or GILTI, rules.

The long-awaited guidance, released Thursday, aims to ensure coordinated outcomes and greater certainty for businesses as they move to apply the global minimum corporate tax rules starting in early 2024. It comes after publication last December of the OECD’s Safe Harbors and Penalty Relief document and public consultations on the Global anti-Base Erosion (GloBE) information return and tax certainty rules in an effort to finalize the implementation framework as originally described in the OECD’s October 2021 statement on its two-pillar solution to address the tax challenges arising from the digitalization of the economy.

The document also includes guidance on the recognition of the U.S.’s GILTI minimum tax under the GloBE rules and on the design of qualified domestic minimum top-up taxes. It also includes more general guidance on the scope, operation and transitional elements of the GloBE rules to allow members of the framework that are in the process of implementing the rules to reflect this guidance in their domestic legislation in a coordinated manner.

The guidance comes in response to feedback from stakeholders on technical issues, such as the collection of “top-up” tax in a jurisdiction in a period where the jurisdiction has no GloBE income, and the treatment of debt releases and certain tax credit equity structures.

“The release of today’s guidance represents the final but significant piece of work on the GloBE Rules that the Inclusive Framework members had committed to deliver as part of the implementation framework,” said Grace Perez-Navarro, director of the OECD Center for Tax Policy and Administration, in a statement Thursday. “While this brings an end to the work we had set for ourselves in October 2021, we will continue, over the coming months, to work hard to ensure that the rules are implemented in a coordinated and administrable manner.”

The package includes guidance on over two dozen topics, addressing those issues that members of the OECD’s Inclusive Framework identified as the most pressing. This includes topics relating to the scope of companies that will be subject to the GloBE rules and transition rules that will apply in the initial years that the global minimum tax applies. Also included is guidance on domestic minimum taxes, known as qualified domestic minimum top-up taxes, that countries can choose to adopt.

“The continued progress in implementing the global minimum tax represents another step in leveling the playing field for U.S. businesses, while also protecting U.S. workers and middle-class families by ending the race to the bottom in corporate tax rates,” said Lily Batchelder, assistant secretary of the Treasury for tax policy, in a statement Thursday. “We welcome this agreed guidance on key technical questions, which will deliver certainty for green energy tax incentives, support coordinated outcomes and provide additional clarity that stakeholders have asked for.”

The guidance will be incorporated into a revised version of the OECD Commentary that will be released later this year and replace the original version of the commentary issued last March. The OECD plans to continue to release more administrative guidance on an ongoing basis.

As for Pillar One, which 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, technical work is still ongoing, with the goal of finalizing a new Multilateral Convention by mid-2023, to take effect in 2024.

The new Republican leader of Congress’s main tax-writing committee voiced his opposition to the new guidance.

“This announcement confirms what has long been true: The OECD agreement is a bad deal for American workers and families, and it has no path forward in Congress,” said House Ways and Means Committee Chairman Jason Smith, R-Missouri, in a statement. “The Biden administration cannot override Congress’ sole tax-writing authority under the Constitution or turn that power over to foreign bureaucrats. The OECD guidance revokes important job-creating tax incentives passed by Congress and threatens to authorize foreign countries to pocket U.S. tax revenues.”

“What’s more, this guidance would fuel the corporate green welfare arms race created by the Biden Administration last year, which will cost American taxpayers hundreds of billions of dollars,” he added. “The House Republican Majority will hold the Biden Administration accountable for its failures at the OECD, and we will reject all proposals that benefit foreign interests over U.S. workers and families, or that violate the U.S. Constitution.”

The Treasury Department said the package of guidance provides certainty on a number of key issues, including:

• Protection of the Low-Income Housing Tax Credit as well as green tax credits, including those that were included in the Inflation Reduction Act;
• Clear and administrable treatment of taxes paid under the existing U.S. GILTI global minimum tax regime; and,
• A consensus statement by all Inclusive Framework members that Pillar Two was intentionally designed so the top-up tax imposed in accordance with those rules will be compatible with common tax treaty provisions.