OECD’s ‘complex’ minimum tax rules have ‘major policy issues,’ BIAC says

By Doug Connolly, MNE Tax

In a January 6 letter to the OECD, business advisory group Business at OECD (BIAC) criticizes “significant policy inconsistencies” in the OECD’s global minimum tax model rules that it considers “potentially fatal” to their operation. Moreover, it contends efforts must be made to reduce the overall complexity of the rules, which could lead to “years of … uncertainty and instability.”

BIAC acknowledged that it found no single technical issue that would impede the operation of the model rules, which the OECD released last month. However, taken together, the rules have a “cumulative” complexity that is going to be a “struggle” for taxpayers to comply with and for tax authorities to administer. This is especially true given the tight timeline for implementation with laws that are still largely unwritten. Accordingly, BIAC urges the OECD to focus work on safe harbors and reducing complexity.

The first of two “inconsistencies” BIAC notes in the model rules is a provision (article 4.1.5) that the group says applies global anti-base erosion (GloBE) top-up tax on multinational groups even when they have no income in a jurisdiction in a year. It acknowledges that there is a policy reason for the way the provision was written related to avoiding sheltering undertaxed income, but it suggests that there are alternative ways to address the issue without imposing a tax in the absence of income.

Regarding the other flagged policy inconsistency, BIAC states that the model rules depart from a policy principle set out in the OECD’s 2020 blueprint that the effective tax rate should be looked at over a period of time to “neutralize the consequences stemming from application of the annual accounting concept under the GloBE rules.” BIAC contends that this objective is undermined by a provision (article 4.4.1) that recasts deferred tax balances at the minimum rate. Such an approach, BIAC argues, will result in double taxation.

The letter adds that there are other potential double taxation issues in the rules, which BIAC intends to comment on in further correspondence. As an example, it notes that the rules require an adjustment to be made to GloBE calculations for a previous year when there is a decrease in the entity’s tax liability for the previous year. However, there is no corresponding ability to adjust GloBE calculations for a previous year when there is an increase in an entity’s tax liability for the previous year.

BIAC also mentions some remaining issues that will still need attention. For one, interactions between the minimum tax and Pillar One will need to be addressed after some outstanding issues with Pillar One are resolved. In addition, more guidance will be necessary to address uncertainty in the event that the US global intangible low-taxed income (GILTI) regime is not deemed to be a qualified income inclusion rule.