137 countries adopt “unified approach” but global tax deal remains uncertain

By Julie Martin, MNE Tax

In a statement released after their January 29–30 meeting, 137 countries that make up the “Inclusive Framework on BEPS” renewed their commitment to try to reach an agreement on an update to the tax rules for multinational groups by the end of 2020 using a two-pillar approach.

The member countries also adopted the OECD’s proposed “unified approach,” with important modifications and clarifications, as the basis for further negotiations on pillar one.

At the same time, the Inclusive Framework will also develop and consider an alternative safe harbor approach to pillar one whereby an MNE could elect on a global basis to be subject to pillar one. In a surprise announcement last December, the US proposed the safe harbor approach, stating that mandatory pillar one rules would never gain the approval of US Congress due to taxpayer opposition.

The statement reports that the US’s safe harbor proposal was not well received by other countries at the Inclusive Framework meeting. “Many IF Members express concerns that implementing Pillar One on a ‘safe harbour’ basis could raise major difficulties, increase uncertainty and fail to meet all of the policy objectives of the overall process,” the statement said.

A final decision on using a safe harbor will be deferred until the architecture of pillar one has been agreed upon, the statement said. The statement acknowledged that figuring out what to do about this issue is “crucial” to achieving consensus on updated global tax rules.

Like the OECD proposal, the Inclusive Framework’s agreed-to unified approach uses a three-tier system to describe the new pillar one taxing rights and calls these Amounts A, B, and C. Also like the earlier proposal, Amount A allocates a portion of a multinational group’s residual profit to countries where a multinational’s customers or users reside.

The agreed-to rules differ, though, regarding the types of businesses that are within the scope of Amount A. In addition to consumer-facing businesses, a new category of automated digital services is added.

Automated digital services are defined as those automated services provided on a standardized basis to a large population of customers or users across multiple jurisdictions. Examples include online search engines, social media platforms, intermediation platforms, digital content, online advertising, and gaming, the statement explains.

Unlike the OECD draft, business-to-business services such as cloud computing are on this list, noted Sophie Chatel, Head of the Tax Treaty Unit in the OECD Centre for Tax Policy and Administration, who also spoke on the OECD webcast. 

The consumer-facing business concept is the same as that introduced in the OECD proposal, Chatel said. It subjects to reallocation a portion of profits from businesses that generate revenue from the sale of goods and services of a type commonly sold to consumers. Examples include personal computing products; clothes, toiletries, cosmetics, and luxury goods; branded food and refreshments; franchise models such as licensing arrangements involving the restaurant and hotel sector; and automobiles, the paper states.

Unlike the OECD draft, though, businesses selling intermediate products and components that are incorporated into a finished product and sold to consumers are excluded, Chatel noted.

Like the OECD draft, extractives products and commodities are excluded from Amount A. Financial services are also excluded except for the narrow category of financial services that are both consumer-facing and unregulated. Airline and shipping businesses are also out.

Thresholds

The new Amount A taxing right would only cover MNE groups with gross revenue over a threshold, potentially EUR 750 million. MNEs also might be excluded if aggregated in-scope revenue is less than a threshold. Further, consideration will be given to carve-outs for situations where the total profit to be allocated under the new taxing right does not meet a set de minimis amount.

To establish nexus, the agreed-to architecture requires a threshold amount of in-scope revenue in a market jurisdiction over a period of years.

Also, in an important change, for some consumer-facing business sales, such as the sale of tangible goods, merely selling into a market would not trigger nexus. Additional, to-be-determined factors, such as a physical presence or advertising in the country, would be needed.

The document also contemplates the exploration of simplified reporting mechanisms such as a “one-stop-shop” or exclusive filing in the ultimate parent jurisdiction.

Mandatory binding dispute prevention

Chatel noted that over 100 countries could be involved in an Amount A profit reallocation. The Inclusive Framework is exploring “mandatory binding dispute prevention” as a mechanism to provide early certainty over all aspects of Amount A, perhaps through the establishment of representatives panels that would carry out a review function.

Matt Andrew, OECD Senior Tax advisor, said the computation of Amount A did not change from the OECD draft. He noted that the new outline clarifies, though, that group consolidated financial accounts are appropriate for the calculation, that profit before tax is the preferred measure to determine the Amount A residual, and that loss carryforward rules will be developed.

Andrew said that technical work needs to be completed to consider whether business line or regional segmentation is required in cases where there are both in-scope and out of scope activities.

Andrew also said that the architecture for Amount B agreed to by the Inclusive Framework is very similar to that in the OECD draft. Much technical work is required in this area, he said.

The statement also includes an update on the status of pillar two, listing outstanding issues that need to be resolved.

Next steps

Saint-Amans said the timeline for future work on the international tax negotiation “may look a bit insane.”  First, the OECD will seek endorsement by G20 finance ministers of the progress made so far at their February 22-23 meeting Riyah, Saudi Arabia. 

After that, on July 1–2, the Inclusive Framework countries will meet in Berlin, Germany, where agreement on the architecture of pillar one and two and their relationship will be sought. 

This work will then sent to G20 finance ministers for their review at their meeting in Jeddah, Saudi Arabia, which will take place July 18–19. 

The final work would be approved by G20 leaders at their summit in Riyadh, Saudi Arabia, to be held November 21–22, he said.

Saint-Amans acknowledged that the process is challenging from both a technical and political standpoint. He said the hoped an agreement can be reached because there really is no “Plan B.”  The alternative seems to be trade wars based on tax disputes, Saint-Amans said.