Global agreement on new nexus rules and minimum tax likely by October, Saint-Amans says

By Doug Connolly, MNE Tax

Momentum is quickly growing for agreement on the final policy approach for new international tax rules on country taxing rights under the OECD’s “Pillar One” and on minimum corporate taxation under “Pillar Two,” according to Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration. Speaking during a panel in an Irish Department of Finance seminar on April 21, he said the frameworks for implementation of an agreement are already in place, and that remaining issues for agreement can be worked out at G20 meetings in July and October.

Saint-Amans attributed much of the escalation of momentum to the increased US push for an international agreement under the Biden Administration. As a result, he believes that G20 finance ministers are on track for broad agreement on the overall approach during their upcoming July meeting. The final details could then be hammered out in scheduled October G20 sessions. He further suggested that the agreement be finalized “with a very tight implementation timeline.”

While the momentum has ramped up recently, Saint-Amans explained, the process has been underway for some time. Following the initial base erosion and profit shifting (BEPS) project recommendations that were released in 2015, it was clear that there was additional work to be done on the issues that would come to be known as Pillars One and Two of BEPS 2.0. He said those conversations truly got moving after US tax reform in 2017 and have been going on for four years now, albeit with some roadblocks along the way.

In the process of the talks on the two pillars, the OECD has put out two blueprints, one on each. The OECD submitted those blueprints for public consultation and early this year received numerous in-depth comments from governments, businesses, and non-governmental organizations.

Saint-Amans said this ongoing process has built some consensus around establishing a new nexus concept based on new revenue sourcing rules. These rules would give countries a basis other than a permanent establishment for taxing foreign companies. He also believes there is an emerging consensus that a percentage of profits should be allocated to market jurisdictions. That allocation would be based on some formula applied to revenues or profits that has yet to be agreed upon.

The other issue under Pillar One that is still lacking agreement is with regards to the scope. While many countries have sought to apply the rules exclusively to digital companies, the US has been adamant that it considers such an approach discriminatory against US companies. This had become an impediment to talks, but Saint-Amans said the recent US proposal offers promise for compromise.

The US proposal would apply the new rules to the largest companies without limiting it to digital companies. However, the proposal would still catch many of those large digital companies that some countries have sought to bring into their tax net. Saint-Amans said that the US proposal “would simplify the approach tremendously and . . . also meet the request from developing countries.” He believes the proposal can clear a path past the difficulties that have held up talks in the past.

Saint-Amans said that the US proposal “would simplify the approach tremendously and . . . also meet the request from developing countries.”

Saint-Amans said that the moves taken by the Biden Administration have also added new impetus to the talks regarding Pillar Two and the concept of a global minimum tax to stem a global downward trend in corporate tax rates.

Even with 139 members in the OECD Inclusive Framework, Saint-Amans said that, although uncertainties remain, he is confident consensus can be reached. With regards to Pillar One, he said all countries would need to get on board, but they will all benefit from keeping the system moving forward. He added that Pillar One implementation would require a multilateral agreement to amend bilateral treaties regarding nexus.

Pillar two, Saint-Amans said, will not require the same level of multilateral agreement. While multilateral cooperation would be helpful, he believes it is not necessary. The US can move, as he paraphrased US Treasury Secretary Yellen as saying, “America first but not America alone.” Other countries can then coordinate with the US action. He noted that Pillar Two does not need, for instance, “zero tax jurisdictions in the Caribbean” to put in place a minimum tax.

Overall, Saint-Amans said these agreements would be good for economic growth and “tax peace.” They would provide tax certainty for businesses to focus on value creation, and they will prevent unilateral country actions on tax that would provoke retaliatory responses.

Although the schedule might seem ambitious because “July is literally tomorrow,” Saint-Amans said most of the work has already been done. The blueprints have the details on how to implement an agreement. Politically speaking, there are a few factors to work out, but there is momentum now. Once agreement is reached, the “technicians will be able to implement whatever is decided.”