OECD: Ensuring A Fairer International Tax System

Pillar One will introduce a new taxing right allowing market jurisdictions to tax a share of the residual profits of the largest multinational companies (Amount A). Tax certainty is a central aspect of this Pillar, which will also provide a mandatory dispute resolution process. The implementation of the Pillar One rules will put an end to trade tensions arising from an unstable international tax system, as it involves the standstill and removal of unilateral Digital Services Taxes (DSTs) and relevant similar measures. In addition, Pillar One will provide a simplified and streamlined approach to the arm’s length principle application (Amount B), taking into consideration developing countries’ needs.  

Uncoordinated digitalisation and increasing globalisation are two key drivers of uncontrolled tax competition between jurisdictions on corporate income tax rates, which has resulted in the so-called race to the bottom. Pillar Two of this landmark agreement will put a floor on this tax competition through the introduction of a global minimum corporate tax at an effective rate of 15 per cent, which will allow countries to protect their tax bases (the Global Anti-Base Erosion (GloBE) rules). Pillar Two also safeguards the right of developing countries to withhold tax on certain base-eroding payments – like interest and royalties – if they are not subjected to a minimum rate of tax, through the “Subject to tax rule” (STTR).

The Implementation Of The Two-Pillar Solution

Following the agreement in October 2021, strong progress has been made towards implementing this historic deal. The Inclusive Framework is developing a comprehensive set of rules, guidelines and practical tools to ensure successful and timely implementation of the two pillars.

With regard to Pillar One, the Inclusive Framework has advanced work on the different workstreams needed to implement Amount A, i.e. the new taxing right. These workstreams – the “building blocks” of Amount A – include work on revenue sourcing and nexus, the tax base, the scope test, exclusions (both concerning extractives and regulated financial services, tax certainty, elimination of double taxation, the marketing and distribution profits safe harbour, withholding taxes, administration, segmentation and unilateral measures).

A critical part of the work on each of these building blocks has been the series of rolling public consultations held throughout the year on the different workstreams. Stakeholder feedback at these consultations has contributed greatly to the Inclusive Framework’s efforts to finalise the rules.

The technical and substantive draft rules, reflecting the work undertaken since October 2021 on the core elements of Amount A, were released in a Progress Report by the Secretariat[ii] for public consultation in July. Written submissions were received from over 70 stakeholders and a live public consultation session held in Paris on 12 September 2022 enabled stakeholders to elaborate on their submissions. Subsequently, the Inclusive Framework released the Progress Report on the Administration and Tax Certainty Aspects of Amount A of Pillar One during its plenary meeting in Paris on 6-7 October 2022.[iii] Together, these two documents and the public consultations provide a clear picture of how the rules for Amount A will work in practice.

The removal of digital service taxes and other unilateral measures is a key part of the Two-Pillar Solution. The Inclusive Framework is now working to publish another consultation document on the withdrawal and standstill of digital services taxes and other relevant similar measures by the end of 2022. Following this, the Inclusive Framework will finalise the terms of the Multilateral Convention (MLC) required to implement Amount A of Pillar One, with the aim of holding a signing ceremony of the MLC by mid-2023 for entry into force in 2024, once a critical mass of jurisdictions have ratified it.

Alongside the progress on Amount A, the Inclusive Framework is advancing the work on the detailed rules for the simplified and streamlined approach to the application of the arm’s length principle to baseline marketing and distribution activities, i.e. Amount B. A consultation document on the implementation and detailed rules for Amount B will be released for public consultation by the end of the year.

The Inclusive Framework is also rapidly implementing the global minimum tax envisaged by Pillar Two. With the Model Global Anti-Base Erosion (GloBE) Rules finalised in late 2021 and their Commentary released in March of this year, members of the Inclusive Framework are now moving to incorporate the GloBE Rules in their domestic legislation, including modifications to current tax incentives and the implementation of qualified domestic minimum top-up taxes. This work is quickly gaining momentum and many countries and jurisdictions – including France, Germany, Italy, Spain, the Netherlands, Canada, Japan, Switzerland, the United Arab Emirates and many others – are moving ahead. In September, five EU countries – France, Germany, Italy, Netherlands, and Spain – pledged to implement the minimum tax, independently of whether an EU Directive is implemented.

The next step of the Inclusive Framework’s work on Pillar Two is the development of an implementation framework for countries in their application of the GloBE Rules. This implementation framework is intended to help countries obtain uniform and coordinated outcomes under these rules and will include a peer review procedure. A further workstream under Pillar Two is the development of a range of measures to help MNEs comply with the new global minimum tax rules, including safe harbours, simplifications, and a standardised return and information exchange framework.

An important part of implementing the global minimum tax will be understanding the implications of Pillar Two implementation for developing economies. At the request of the Indonesian G20 Presidency, the OECD has analysed the implications of the GloBE Rules for the design and application of tax incentives, with a focus on developing countries. Evidence suggests that tax incentives are frequently inefficient and counterproductive, leading to low- or no-taxed windfall gains for MNEs and significant revenue losses for governments, particularly in developing countries. As a result, there have long been cautions about their use as a tool to attract investment. Our recent report on Tax Incentives and the Global Minimum Corporate Tax demonstrates how the GloBE Rules may affect different forms of tax incentives and emphasises that the design of tax incentives will need to be carefully reconsidered in a post-Pillar Two environment. It provides practical recommendations for policymakers in emerging and developing countries in reassessing their tax incentives as they implement Pillar Two.[iv] 

Ensuring that developing countries can effectively apply the MNE rules, without compromising their ability to attract foreign investment, will also be critical. To address both issues, the OECD will soon launch a series of pilot programmes to help developing countries assess the impact of the GloBE rules, and their interaction with domestic tax incentives and tax policies, with a goal of providing a clear pathway towards their implementation.

Tax Transparency And The Crypto-Asset Reporting Framework

While implementing the Two-Pillar Solution is a key focus, the OECD also continues to advance on other critical aspects of international tax reform.

Spearheaded by the G20, the OECD’s efforts on tax transparency continue to achieve results. In 2021 alone, over 100 jurisdictions exchanged information under the standard on the automatic exchange of financial account information (AEOI). The information exchanged covered 111 million financial accounts, with a total value of EUR 11 trillion.[v] Moreover, the implementation of the AEOI standard is closely monitored, with approximately two-thirds of the jurisdictions implementing AEOI now on track.

An important recent development to increase tax transparency is the release, in October 2022, of the Crypto-Asset Reporting Framework (CARF). Unlike traditional financial products, crypto-assets can be exchanged or held without the involvement of traditional intermediaries and without the oversight of a central administrator. To avoid the use of crypto-assets for tax evasion, the CARF will ensure transparency with regard to crypto-asset transactions through automatic exchange of information with taxpayers’ residence jurisdictions on an annual basis, in a standardised manner similar to the Common Reporting Standard (CRS).[vi] In parallel, the OECD has also put forward a range of amendments to the CRS to modernise its scope to fully cover digital financial products and to improve its operation.

The Inclusive Forum On Carbon Mitigation Approaches

The OECD is also prioritising efforts to reduce greenhouse gas emissions through pricing and non-pricing mechanisms.  In June 2022, OECD members agreed to the launch of the Inclusive Forum on Carbon Mitigation Approaches (IFCMA).

The IFCMA will support the transition to greener economies and enable countries to meet ambitious emissions reduction targets, by facilitating greater multilateral dialogue, informed and facilitated by technical and objective analysis. This will help ensure that carbon mitigation efforts are effective and avoid negative international spillovers, such as carbon leakage.

To date, there is no global, comprehensive and systematic international analysis of policies to address climate change in terms of their effectiveness. The IFCMA will foster exchange among countries, facilitate easier access to systematic data and analysis to support better understanding of the combined effect of diverse policy approaches and enable countries to share their climate change mitigation policy experiences. By improving mutual understanding of the expected impact of a full range of policy approaches to reduce emissions, the IFCMA will help governments to enhance national actions, including under Nationally Determined Contributions (NDCs), taking into account their different starting points and circumstances.

The IFCMA will undertake technical and objective analyses of the effectiveness of the range of climate change mitigation policies across countries at different stages of development. The initiative will not serve as a standard-setting body, nor will it “rank” countries. The IFCMA will develop a rigorous assessment of cross-country and country-level mitigation policies by taking stock of price-based and non-price-based climate change mitigation policies and assessing the impact of different policy approaches on greenhouse-gas emissions.

The work of the IFCMA will be carried out in close co-ordination with other relevant international organisations to exploit synergies and avoid duplication, including the UN, IMF, World Bank and IEA, by collecting data, developing tools and providing results in consultation with country experts. The IFCMA will also build on the work of other fora such as the Coalition of Finance Ministers for Climate Action and existing OECD initiatives such as the International Programme for Action on Climate.

The first meeting of the IFCMA will take place in Paris in February 2023.

Conclusion

The work done by the Inclusive Framework continues to have a real impact in ensuring a fairer international tax system that is responsive to the needs of countries around the world. To drive this process forward, it is critical that we move forward to make the Two Pillar Solution a reality, building on the work currently in progress and already carried out by the Inclusive Framework. Without the Two Pillar solution, the alternative is the re-emergence of uncoordinated, unilateral tax measures, leading to damaging tax and trade disputes and augmenting the current economic uncertainties.

Similarly, the release of the Crypto-Asset Reporting Framework will also ensure that the international tax system can adapt to the demands of an increasingly digitalised world, by building on the success of the Common Reporting Standard to provide transparency with regard to crypto-asset transactions. This will enable country tax transparency frameworks to remain up-to-date and effective.

Finally, the OECD’s Inclusive Forum on Carbon Mitigation Approaches seeks to support dialogue to increase global carbon mitigation efforts through data on and analysis of countries’ greenhouse gas reduction strategies. As the IFCMA now gets under way, we look forward to welcoming countries from around the globe, on an equal footing, to the first meeting of the IFCMA in Paris in February 2023.

 

Footnotes:

[i] Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy – 8 October 2021 (oecd.org)

[ii] OECD (2022), Progress Report on Amount A of Pillar One, Two-Pillar Solution to the Tax Challenges of the Digitalisation of the Economy, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris, www.oecd.org/tax/beps/progress-report-on-amount-a-of-pillar-one-july-2022.pdf.

[iii] Progress Report on the Administration and Tax Certainty Aspects of Amount A of Pillar One – Two-Pillar Solution to the Tax Challenges of the Digitalisation of the Economy - OECD

[iv] OECD (2022), Tax Incentives and the Global Minimum Corporate Tax: Reconsidering Tax Incentives after the GloBE Rules, OECD Publishing, Paris, https://doi.org/10.1787/25d30b96-en.

[v] OECD (2022), OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors, Indonesia, October 2022, OECD, Paris, www.oecd.org/g20/topics/international-taxation/oecd-secretary-general-tax-report-g20-finance-ministers-indonesia-october-2022.pdf

[vi] OECD (2022), Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard, OECD, Paris, https://www.oecd.org/tax/exchange-of-tax-information/crypto-asset-reporting-framework-and-amendments-tothe-common-reporting-standard.htm.