BEPS 2.0 implementation continues to vex multilateral policymakers


While there is little doubt that political commitment remains high with respect to pillars one and two of the ambitious project to address the tax challenges arising from the digitalisation of the economy, widely known as BEPS 2.0, the events of 2022 are illustrating just how difficult the design and execution of such an ambitious, complex, and consensus-based undertaking can be.

Landmark political agreement on high-level elements of the project was first reached by a majority of the members of the Inclusive Framework on Base Erosion and Profit Shifting (IF) on October 8 2021, and 137 jurisdictions subsequently joined. That agreement was accompanied by a detailed implementation plan that was based on very ambitious deadlines and that guided an intense period of work for the IF in the six to eight months thereafter.

Perhaps unsurprisingly, that is where things stopped being simple, and the period since has been characterised by continued intense debates on the technical (and, in particular, implementation-related) elements of both pillars, and delays to pillar one specifically.

“Nine months after this historic agreement, the development of the Two-Pillar Solution is well advanced,” the OECD noted positively in a progress report on July 1 2022. “At the same time, the novelty of the concepts relating to this new taxing right and its integration within the existing international tax architecture merit further deliberation with respect to a few of the building blocks. Here, the [IF] recognises that it is important to balance the political interest for swift implementation with the need to properly finalise the design of innovative new rules intended to last for decades. As part of this process, the [IF] has also decided to seek feedback from stakeholders on the overall design of the amount A rules, as well as specific building blocks before reaching final agreement.”

So, what issues sit at the heart of this “incredibly difficult implementation phase”, as Fabrizia Lapecorella, the chair of the OECD Committee on Fiscal Affairs, described it at an OECD tax event in June 2022, and what should taxpayers expect?

When the OECD began its BEPS 2.0 design work on behalf of the IF members in 2019, the participating governments committed to an ambitious timeline, stating that a solution based on two pillars would be delivered as early as 2020. Committing to such a compressed timetable is understandable, if not always entirely achievable. From a political standpoint, setting a timeline that is anything but ambitious can often be viewed as suboptimal, due to election cycles.

Those well versed in the effective design and implementation of complex tax mechanisms fully understand, however, that once the layers of the onion of such a complex plan are peeled back, all bets are off. In that regard, the anticipated trajectory of such an intricate multilateral solution will always be subject to change as it is developed and new complexities emerge.

As a result, the OECD has had to acknowledge that much of pillar one remains unfinalised and under intense debate by IF members. While the design and implementation framework for pillar two (on a global minimum effective tax rate of 15%) is well under way (and, in the case of the design of the subject to tax rule, ongoing), the timeline for pillar one is to be adjusted, and the amount A rules will now not come into force until 2024.

On July 11 2022, the OECD released a progress report, a consultation document by the Secretariat and presented in the form of domestic model rules that address many of the building blocks with respect to the new taxing right.

As noted in the progress report, rules on the administration of the new taxing right, including the tax certainty-related provisions, were not yet available, though a slightly earlier 2022 consultation provided new information on what the OECD Secretariat is considering. The progress report does, however, provide a revised high-level timeline for completion of the work on pillar one, setting out the following key action steps:

  • Stakeholder feedback on the report was sought by August 19 2022 (and will be published on the OECD’s website, as has been the case with prior consultations);

  • The IF will review this stakeholder input and seek to stabilise the rules at its meeting in October 2022; and

  • The work on the detailed provisions of the Multilateral Convention (MLC) – the instrument via which the final rules will be implemented – and its explanatory statement are expected to be completed with a signing ceremony anticipated in the first half of 2023. The objective is enabling it to enter into force in 2024 once a critical mass of headquarter and market jurisdictions (as defined by the MLC) has ratified it.

The progress report states that good progress has also been made on advancing the work on Amount B, to be delivered by year end.

A flurry of summer activity

While many in the international tax community were probably casting their minds forward to re-establishing holiday travel after two full years of COVID-19 restrictions, May, June, and July 2022 were instead characterised by a flurry of activity for members of the OECD Secretariat, national policymakers, and business stakeholders. During this period, a number of reports, events, and other communications were issued.

The progress report on amount A provides useful insight into negotiators’ latest thinking. It provides companies that may be within the scope of the provisions with an impression of how the provisions might work in practice but does not provide a full and clear picture quite yet. The draft rules are not firm, and key components are missing. Commentators and negotiators alike are also expressing concerns about the feasibility of implementing these rules in domestic legislation.

More clarity on pillar two

As noted, the OECD’s progress report sets out that the pillar two work is well advanced, with model rules for implementation having been released in December 2021 and the related commentary published in March 2022.

However, it has not all been smooth sailing on pillar two. On June 17 2022, ECOFIN, the grouping of EU member state finance ministers, failed to win the required unanimous support for its proposed Anti-Tax Avoidance Directive (ATAD III) to implement the pillar two rules in the European bloc, with Hungary declining to sign a compromise text of the proposal.

The UK, on the other hand, is one of several jurisdictions that seem to be forging ahead at full pace, releasing draft legislation on July 20 2022 on the “Introduction of the new multinational top-up-tax” building on the pillar two Global Anti-Base Erosion (GloBE) Model Rules published by the OECD on December 20 2021. Most recently, the UK has been joined by South Korea and Malaysia in proposing minimum taxes.

The model rules – as they will be for pillar one – are an effective template by which governments could legislate for the global minimum tax rules. The draft legislation confirms that the income inclusion rule (IIR) is expected to apply to accounting periods commencing on or after December 31 2023, while details on the timing and design of the UK’s undertaxed profits rule (UTPR) were not included.

Towards implementation: more of the same, or different?

This is clearly a critical time in the implementation of pillar one and pillar two, and after so many years of related multilateral action, the OECD and national policymakers will be acutely aware that serious divergences between how the rules are designed and how they operate in practice can sometimes occur. This is especially the case when the reins are handed from policymakers to legislators and then to the administrators charged with policing the tax regime. Addressing that will take a committed focus and, importantly, time.

The OECD’s progress report is an engaging read and provides taxpayers with the opportunity to assess whether the IF will stick to its original intention that the negotiation “will be driven by finding the right balance between accuracy and simplicity” and that “any solution needs to be administrable by tax administrations and taxpayers alike”.

The current draft of the rules included in the progress report will serve as the substantive basis for negotiating the MLC, through which amount A will be implemented. In addition to the operative provisions of amount A, the MLC will also contain provisions requiring the withdrawal of all existing digital services taxes (DSTs) and any relevant similar measures with respect to all companies, as well as a commitment not to enter into such measures in the future.

All eyes will now be on the IF meeting in October 2022, a full year after that group reached political agreement on the key parameters of both BEPS 2.0 pillars.

As noted earlier, the OECD expects that a signing ceremony for the MLC can be held in the first half of 2023, with the objective of the model rules entering into force in 2024 once a critical mass of jurisdictions ratifies it. So, is this a case of rushing towards a conclusion as quickly as possible but hoping for an outcome that avoids delay and misunderstanding? Only time will tell, but the coming months will require a renewed focus and engagement by business across the spectrum of BEPS 2.0 building blocks and consultations. It is simply too important to do otherwise.

The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.

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