THE GloBE- Part A.
1.????The complexity of the GloBE rules:
In the academic world as well as in practice, there has been an increasing recognition of the need for a multilateral tax treaty, which represents a milestone in the evolution of the international tax regime (ITR). The multilateral tax treaty makes more sense than a network of bilateral tax treaties and to appreciate the importance of the MLI, it is useful to take a step back and identify that bilateral tax treaties were first negotiated in the 19th century with their importance growing after World War 1 because of the increased tax rates and the risk of double taxation. [1] The first model bilateral tax treaty was published in 1928 under the auspices of the League of Nations when issued draft model bilateral income tax treaties[2] for the reciprocal relief of double taxation of international income. So, a reform based on multilateral agreement does not have to be harsh, direct, confrontation with the current international tax regime,[3]as the primary goal of the MLI is to support and fortify the bilateral nature of tax treaties. The United States treaties are already compatible with the BEPS recommendations and therefore do not require modifications of the type included in the MLI.[4] An additional multilateral instrument will be required with the introduction of the GloBE and will be the only means to ensure that the rules are co-ordinated in a legally binding form. To ensure co-ordination in the application of the IIR and UTPR, provisions could be included to provide certainty and consistency of the rules.[5]
The provisions would be included in a new multilateral convention which would be a standalone public international law instrument designed specifically to coexist with the existing tax treaty network. The multilateral convention could also contain the exchange of information and dispute resolution mechanisms.[6] So, a new international tax regime fit for the 21st century which envisages bringing to the table the world at large also requires a dispute prevention and resolution mechanism to hold it together,[7] and to ensure agreed allocation. So, all treaties involving the members of the IF on BEPS should include a Mutual Agreement Procedure (MAP) article that is in line with Article 25 (1-3) of the OECD Model Tax Convention[8] and initiated when a taxpayer considers that taxation is not in accordance with the tax treaty in the case that a jurisdiction has applied the STTR or the SOR.[9]
As some global blending is permitted in determining the effective tax rate, the STTR is applied to specific payments and whether the rule applies, depends on the rate in the source country, not the company’s effective tax rate.[10] So, if the central management and control of a corporation is in the US or if the voting control is held by domestic nationals or residents, the US may exert taxing the corporation even though organised under foreign laws and doing business abroad. In order to deal with some of the difficulties, in 2017, the Tax Cuts and Jobs Act (TCJA)[11] included the GILTI,[12] the base erosion anti-abuse tax (BEAT) [13] and new types of minimum taxes were introduced, based on large corporations’ financial accounting statements or ‘book’ income.[14] The BEAT requires certain MNCs to pay the greater of a) the regular corporate tax, computed at the generally applicable twenty-one percent rate and b) the BEAT itself, computed at a ten percent effective tax rate but after adding back all the deductible payments that the taxpayer made to foreign affiliates.[15]Base eroding payments like the US BEAT could violate the non-discrimination article of the OECD Model and UN Model and as a result,[16] changes to the tax treaties would be necessary.
2. General Comments:
Strengthening the CFC rules would be much simpler than adopting the completely new minimum tax approach and have one set of rules to apply.[17] Also, the CFC rules have the advantage of being familiar to most of the international tax community, [18]with the design features, operation and flaws in the rules being reasonably well-known, where a global minimum tax is an uncertain territory. If all countries implemented the GloBE rules, countries could engage in other forms of tax competition to raise more revenue, combat tax planning that shifts profits elsewhere and make their jurisdictions attractive so companies may allocate real activities and profits there.
Regarding Pillar I, a new special-purpose nexus rule will permit the allocation of Amount A to a market jurisdiction when the in-scope MNE derives at least 1 million euros in revenue from that jurisdiction, under Pillar 1. So, between 20-30 % of residual profit defined as profit in excess of 10% of revenue will be allocated to market jurisdictions with nexus using a revenue-based allocation key. [19] The next question is who will be paying the Amount A? Given that financial and extractive companies are excluded, only 78 of the world’s 500 largest companies will be affected.[20]. So, a significant change in the existing rules for allocating taxable income between countries, with a new allocation to market states of 20% to 30% of the profits of the largest MNEs that exceed a 10% profit margin, as well as the introduction across the board of a global minimum effective tax rate.[21] Those 78 companies will need to deal both with Pillar I and Pillar II rules, with an additional burden on compliance.
Also, imputation is an issue under Pillar II, because the UTPR taxes low tax profits in the Head Quarters (HQ) country and the shareholder tax refunds generally reduce ETR. If the shareholder refund under imputation does not affect the ETR, the question remains as to whether the GloBE tax will be creditable to the franking account. Further, what will be the effect of Government Grants? ETR is equal to the tax divided by income and suppose that the ETR is 15% and the company is entitled to a grant of $100, what will be the effect of the post-grant ETR? Will it be negative tax, for example bringing the ETR to 5% or income and bringing the ETR to 13.5% or ignored and the ETR being the same 15%.
So, the GloBE proposal operates on a per-country basis and dividing the taxes imposed by a jurisdiction by the income attributed to a jurisdiction reveals the ETR and the IIR will require the parent company to impose tax if the rate is too low.[22] The GILTI threshold sets an implied minimum tax rate at which excess cross-border corporate profit will be taxed. Because the threshold is measured in the aggregate, it does not allocate tax revenue among foreign jurisdictions. [23]The tax GILTI is not quite a source of public revenue levied on a worldwide basis, it approaches the definition because it is collected without the consent of the affected jurisdiction and because the United States does not specify how the tax will be allocated.[24]
?Conclusion:
Pillar II rules fail all the criteria for a good international tax system as there are issues in practice and being adopted by all or most countries, having countries to agree to a detailed set of harmonised rules which incorporate a strong form of minimum tax. Even then, it is not clear that some technical issues, such as those involved in the calculation of effective tax rates, can be solved[25]or even agreed to a tax rate to start with. The consultation documents also leave open implementation approach as each approach will give different effects[26] and further adjustments will be required to eliminate specific items of income from the tax base, such as intragroup dividends and certain expenses, example, tax-deductible stock-based compensation. One must still ask as to whether a global minimum tax should be regarded as a good idea or a self-inflicted wound. Hopefully, Pillar II will succeed, a new international tax regime will emerge, and a positive result will come out of the OECD.
[1] Reuven Avi-Yonah and Haiyan Xu, 2017, A Global Treaty Override? The New OECD Multilateral Tax Instrument and Its Limits, 2017, University of Michigan, Public Law and Legal Theory Research Paper, Paper No. 542
[2] Report Presented by the General Meeting of Government Experts on Double Taxation and Tax Evasion, League of Nations Doc. C562 M.178 1928 II (1928).
[3] Brauner, Y., 2018, McBEPS: The MLI- The First Multilateral Tax Treaty that Has Never Been, Intertax 6-17, 1.
[4] Owens, J., Stack, R., 2017, Conversations, Tax Notes International 715.
[5] OECD 2020 [705].
[6] ibid [708].
[7] Avi- Yonah, R., 2021, The Interaction between unilateralism and multilateralism in International Tax, Draft 02/18/21, 17.
[8] OECD 2020
[9] ibid [711].
[10] Devereux et al 2021 33.
[11]United States Congress, S. 2254, 115th Congress: Tax Cuts and Jobs Act, 2017, (TCJA).
[12] Internal Revenue Code 1986, (I.R.C.) Foreign-derived intangible income and global intangible low taxed income, §250 (a)(1)(B)(ii).
[13] I.R.C. §951A (2018) for GILTI and I.R.C. § 59A (2018) for BEAT.
[14] McBride, W., Watson, G., 2021, Evaluating Proposals to Increase the Corporate Tax Rate and Levy a Minimum Tax on Corporate Book Income, Tax Foundation, Fiscal Fact No. 75; Bunn, D., 2021, Can GILTI and the GloBE be harmonised in a Biden administration, Tax Foundation, DC.
[15] I.R.C. § 26A (b)(1), the base erosion minimum tax amount to be the excess of ten percent of the BEAT’s base over the regular tax liability under I.R.C. § 26(b).
[16] Arnold 2019 [6.3.2].
[17] Arnold 2019 [6.3.2].
[18] ibid
[19] OECD/G20 Base Erosion and Profit Shifting Project, Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, 1 July 2021, 2, viewed at: Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy – 1 July 2021 - OECD
[20] Devereux, M., Simmler, M., “Who Will Pay Amount A?” European Network for Economic and Fiscal Policy Research, EconPol Policy BRIEF, Vol.5, 36, 2021, European Network for Economic and Fiscal Policy Research.
[21] Collier, R., Devereux, M., 2021, “On why it really is such a big deal,” viewed at: On why it really is such a big deal | Oxford University Centre for Business Taxation
[22] OECD 2020 [416]
[23] Morse, S.,’The Quasi-Global GILTI Tax, Said Business School Working Paper 2020-21, 2
[24] White House, Fact Sheet: The American Jobs Plan, March 31, 2021, available at: FACT SHEET: The American Jobs Plan | The White House
[25] Devereux et al 2020 2.
[26]Arnold 2019 3.