Will BEPS 2.0 get over the line?

The last few weeks have seen a number of important milestones in the OECD proposals for reforming international tax rules.?A G7 Communique was issued in June expressing strong support for the two pillar approach,?albeit some aspects had changed from earlier OECD blueprints, particularly in relation to the scope of Pillar 1.?On 9 July 130 out of 139 members of the OECD Inclusive Framework (IF) agreed a statement that built on the G7 Communique.?Out of the 9 hold out nations, two have?since signed (Peru and St Vincent and the Grenadines).??On 10 July G20 ministers added their support to the current form of the proposals.?

Currently the remaining hold-outs are Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, and Sri Lanka.?However, one big win for the process was China’s support.?There had been an expectation that China might be a hold-out because they were angling for a substance based carve-out from Pillar Two.?This carve-out made its way into the IF statement and presumably oiled the wheels for China’s agreement.???Poland had expressed similar concerns regarding a substance carve-out and they also signed the IF statement.?

Progress within the EU will be worth monitoring.?Three of the countries that did not sign up to the IF statement are in the EU.?In addition, Cyprus is an EU member state but not part of the IF and has not given any formal statements on the proposals.?Consistent implementation of the rules across the block will need a Directive and that will require unanimity across all 27 member states.?Without this any EU implementation could be uneven creating a compliance and international dispute nightmare for multinationals.?For the time being the discussions continue and the focus for the EU will be on bringing the doubters on board. ?Ireland has already expressed a willingness to continue the dialogue and recently met with Janet Yellen, the US Secretary to the Treasury.?The expectation is that the EU will eventually find unanimity but it will be interesting to see what causes Ireland and the other EU sceptics to flip and support reform.?

Eyes will also watch the US with interest.?The G7 Communique was largely aligned with the US position communicated by the Biden Administration when they re-engaged in the OECD process.?There is a clear intersection between the IF statement and the wider domestic tax reform that President Biden is seeking, particularly around GILTI.?However, the passage of any domestic tax reform through a finely balanced Congress is far from certain and without this it is difficult to see how BEPS 2.0 gets over the line.?The two OECD pillars are a package but the importance assigned to each of them varies.?Without US implementation of Pillar One other counties such as the UK, which sees Pillar One as the priority pillar, may not stay the course.?

The interaction of progress with the removal of existing Digital Service Taxes (and similar measures) will also be worth watching.?The US wanted all DSTs removed on agreement but it is difficult to see how other countries would agree to this when the passage of any reform through US Congress could be sticky and obtaining US agreement to any multilateral instrument has historically been complex.??In the meantime, the EU has already put its proposals for a Digital Levy in its back pocket while it waits for more detail from the OECD on the two pillars in the Autumn.?

There is still a long way to go before BEPS 2.0 gets over the line but there is clear political momentum for it to do so, not least because no reform would lead to a rash of unilateral digital taxes with the consequential risk of multiple taxation for businesses.?

Over the next few weeks some of our BEPS 2.0 experts including will be posting short items on LinkedIn on some of the more complex and potentially contentious points of the two pillars.?I hope you will follow our ‘Pillar Talks’, which we'll share here, and join in the conversation!

Tim Sarson and Sharon Baynham