A Visit from Saint Amans

Twas the week before Christmas, and all through the tax world not a feature was published, not even an update. The KPMG policy team was hanging out by the OECD website in hope that the the much anticipated ‘Pillar 2’ model rules soon would be there.

Well in the end they came tumbling breathlessy down the chimney yesterday. These rules provide a template to help countries introduce domestic legislation to ensure MNEs pay a minimum level of 15% tax on income arising in each of the jurisdictions in which they operate.

Delays meant that the rules were released on a day when most of the international tax community had already put on their out of offices and donned their Santa hats, with GloBE, IIR and UTPR being the last things on their minds: so it may be early January before we start to see any meaningful analysis of the technical details. In the meantime, here at Tax Policy HQ, we took a moment to put down our festive cheese and wine to give you our initial thoughts on what came out of the OECD yesterday.

Stocking fillers

There had been rumours that delays in progressing President Biden’s Build Back Better Act risked the US derailing the OECD’s Pillar 2 plans. But the fact the documentation was released suggests that international political consensus and confidence in the reforms remains strong. That being said, it is unusual that the rules were released without the commentary that sits alongside them: in particular commentary relating to how the rules will co-exist with the US Global Intangible Low-Taxed Income (GILTI) rules will not be released until early 2022, so there may still be some bumps in the road before this is a done deal.

The rules released yesterday confirm that the starting point for calculating if a business requires to pay top-up tax is tax per the statutory accounts (with a few exceptions for certain types of timing adjustments), not cash tax . Whilst this approach is still not without its complications, it could have been worse, and should mean the worst distortions from timing differences will be avoided.

Lumps of coal

The revenue threshold of 750 million euros remains a steep cliff edge and means businesses just below the cut-off need to start thinking about compliance now before their growth tips them over. This is exacerbated by new provisions in the rules that emerged yesterday which say the rules apply if the revenue the threshold is met in at least two of the four fiscal years immediately preceding the tested fiscal year, further complicating compliance for businesses at the cusp. I do wonder whether this cliff edge, as pronounced as it is, will lead to some behavioural change in companies on the margins (for example when assessing M&A opportunities), and indeed for some countries looking to attract SME investment.

The biggest concern for multinationals is that, despite the model rules being released yesterday, with little over a year to go until enforcement a huge amount of detail is still unknown. As well as having no commentary on the model rules, a full implementation framework is not due until next year, so question marks still linger over the administrative burden of compliance for businesses. The Inclusive Framework is also developing the model provision for a Subject to Tax Rule, together with a multilateral instrument for its implementation, to be released in the early part of 2022 with a public consultation even in March. That's before the necessary domestic consultations and legislation in the UK and elsewhere.

Even in the detail of what was published question marks are already emerging. For example, it was originally indicated in October 2021 that UTPR would not be implemented at the same time as IIR but would instead be delayed by a year and be implemented in 2024. The model rules do not mention anything in respect of this delay, so the working assumption is that it will remain in place.

As we put our party hats back on in Tax Policy HQ (subject to negative lateral flow test), and wish you all a Merry Christmas and Happy New Year, we look forward to returning in January and updating you all on the next instalment of the Pillar 2 journey.

In the meantime if you fancy exploring the details here is a link to the OECD publication: Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two) - OECD

Happy Christmas to all, and to all a good read!