Part two: international tax consultation on “digitalization” draws 50 speakers (pillar two)

 By Julie Martin, Editor, MNE Tax

Part two of two. This article summarizes discussion of the “pillar two” proposals at the OECD  digitalization consultation, held March 13–14 in Paris, which featured more than 50 speakers. The pillar two proposals, described in a February 13 OECD discussion draft, call for global adoption of a minimum tax and a tax on base eroding payments. Part one of this series, which addresses the “pillar one” proposals, is available here.

Joachim Englisch of Münster University and SciencesPo, opened the discussion by summarizing the proposals that make up “pillar two” in the OECD’s February 13 discussion draft. The minimum tax proposal still lets countries set their own nominal income tax rate but, if the rate is too low, there is income inclusion in parent jurisdiction through extended CFC rules or, for foreign PEs, a switch-over clause, Englisch said. The second proposal, addressing base eroding payments, would either bar deductions for related-party expenses in the payor jurisdiction or impose withholding tax on those payments, he said. Englisch said the pillar two proposals have the potential to address efficiency and fairness concerns that were not addressed in BEPS or even made worse by BEPS. Englisch disagreed with commentators that want more time to assess the results of the BEPS project to see if profit shifting concerns “disappear” before proceeding with international tax changes. It is “relatively obvious” that profit shifting opportunities remain, though post-BEPS it is more complex and costly because now MNEs need a certain degree of substance underlying a contractual risk or IP ownership allocation, he said. Moreover, Englisch said that BEPS exacerbates tax competition for real investment. Before BEPS, investments were made in one country and returns were shifted to preferential tax regimes or lower tax jurisdictions but that cannot be done now, he said. The proposed minimum tax sets a ceiling on tax competition in a “paradigm shift” from BEPS’ endorsement of patent boxes, he said. Englisch said that international tax competition is good for efficiency reasons but excessive competition hurts other countries. Small jurisdictions that benefit from tax competition might be preventing large countries from imposing tax at the rates they want and therefore affecting the tax rates on labor versus capital in those countries. Englisch said a minimum tax is also warranted because, in the future, artificial intelligence will cause fewer people to be needed for technical IP DEMPE functions as these functions can be performed remotely. Thus, real value creation will occur more in low tax judications. He also said that countries are likely to follow the US’s lead by adopting their own version of GILTI and BEAT. Thus, achieving consensus on a consistent approach will avoid double taxation and increased compliance costs. Englisch also said the pillar two proposals would level the playing field as local SMEs can’t take advantage of low tax jurisdictions. He also said that pillar one and pillar two can be adopted together and that global implementation of pillar two is needed to stop inversions.

Barbara Angus of EY said the OECD should proceed cautiously with the pillar two proposals as they break new ground. She said that clarification is needed regarding the objective of pillar two. Both pillar one and two seem to address the same concerns and, if they do, the proposals should be combined into one solution. She said pillar two seems to respond to remaining BEPS concerns. We should wait for the outcome of BEPS implementation to play out, she said. She said that if the aim is to target countries with no or low taxation, these rules conflict with the longstanding understanding that each country is sovereign and can set is own tax rate and also the understanding that low tax rates themselves are not a harmful tax practice. She said that this is not an area where a global one-size-fits-all solution is workable. She said the proposal goes way beyond BEPS and has implications for real economic activity.

Georg Geberth, Siemens said business did not expect this proposal in the context of solving perceived under-taxation of the digital economy. Geberth said that if pillar two proposals are adopted anti-abuse rules could be deleted and also the pillar one proposals may not be needed. This is not about taxing value creation which was fundamental to the BEPS process, he said. Pillar two would apply to legitimate transactions with the trigger only being the rate. He said the rules contradict to the concept of capital import neutrality which ensures the same taxation of domestic and international business. He also said that the data shows that the tax rates are not racing to the bottom, rather they are converging in the middle. If the proposals are adopted, simplicity is key, he said. Geberth also said there should be a white list of countries that have good CFC rules in place. Geberth said that R&D credits should not be penalized by the proposal. Also, the tax rate must be “extremely moderate,” he said.

Joy Ndubai, on behalf of the Tax Justice Network, Action Aid, and Tax Justice Network Africa said that the proposed tax on base eroding payments falls short because it is highly reliant on administrative capacity, cooperation, and transparency, which is unrealistic. These rules need to be made simpler, she said. Ndubai was more supportive of the income inclusion rules, but these rules may also be problematic to the extent that they rely on an effective tax rate test which is also complex. Ndubai said the income inclusion rules would not work unless the rules defining the tax base are made more clear and are defined at the corporate level. She said developing countries should move away from indirect taxes because they have progressivity risks. She also questioned whether the OECD the appropriate forum to set international tax standards. “We need a proper global tax body that can include all concerns,” she said. She also said that, in the past, the OECD has refused to recognize the race to the bottom, instead seeing a race to the middle. We need to start to talk about what tax competition has done to developing countries, Ndubai said.

Will Morris of Business at the OECD (BIAC) said countries need to figure out what they want to achieve. He said pillar one and pillar two are trying to do two different things that may be antithetical. In pillar one, you reallocate to the market judication away from other countries and pillar two you reverse that reallocation by holding income back. He said this interaction must be explored. Responding to Ndubai, Morris said that the OECD is the right place to set international tax standards. The Inclusive Framework is an improvement over the BEPS process, he said.

Prof. Dr. Pasquale Pistone said his personal view is that while he wants to end harmful tax practices, he agreed with Angus that a low tax rate does not per se imply an abusive practice.

Derek Theurer of the Business Roundtable said that any new international tax policy should minimize double tax, administrative burdens, and disputes. A dispute resolution procedure should be a part of whatever is decided. He said we should wait to adopt the pillar two measures until the BEPS measures are fully implemented. Global anti-base erosion rules are complex and daunting, he said, noting that implementation and adoption of similar rules in the US was a multiyear process, he noted.

Sol Picciotto of the BEPS Monitoring Group and an Emeritus Professor, Lancaster University noted that all business representatives have asked for coordination of pillar one and two. He said that could be achieved if countries move to substance test for allocating or apportioning the tax base. This can be backed up by the mechanisms of income inclusion and denial of deductions, he said. Picciotto said you do not need unanimity among countries to agree to new allocation rules; you would only need a coalition of willing countries to come together, such as countries that have a reasonable tax rate of perhaps 20 percent. He said these countries could also agree to apply pillar two or maybe tax competition could instead be allowed to attract real activities, he said.

Krister Andersson chair tax policy group of Business Europe said that while the two pillars have different objectives, the need for action in pillar one will be mitigated if pillar two is adopted. Remaining concerns may be addressed through the existing transfer pricing rules, he said. He also said that as the pillar two proposal is a German/French proposal, it will likely be further developed in European Union discussions.

Jonathan Leigh Pemberton of the World Bank Group said both pillars are welcome because they address continuing base erosion risk. He said that unless there is global adoption of an income inclusion rule, countries that do adopt such laws will risk having their companies invert. The World Bank believes the real problem is the realization of profits in entities with little substance that are subject to low rates of tax. He said that a mechanism that addresses that directly might be better and the World Bank published a proposal on it this week. Pemberton said that pillar two taxes profits that no one is currently taxing so it might be possible to achieve consensus here. Maybe this should be addressed first while a more wide-ranging discussion of reallocation of taxing rights takes place, Pemberton said.

Laurence Brochet, Dassault Systèmes, agreed that the proposals came as a surprise as the aim of the digital economy initiative was to level the playing field between enterprises and make sure tax is paid in the right place, not to add more BEPS antiabuse rules. Brochet said the US’s BEAT seems to be an inspiration for pillar two. She said that for her company, the BEAT has resulted in expenses that are not deductible in the US but subject to tax in France at a rate of 35 percent. She wanted to know if the Inclusive Framework will have access to these business comments.

Sylvain Montoro, Head of Finance and Tax at BlaBlaCar, said that his company supports the pillar two proposals. He said the proposals are easy to understand but hard to implement. Many countries will need to significantly change their tax regulations. Montoro said that countries’ tax bases should also be harmonized. You can have a large tax base and a low tax rate or a small base and high tax rate. He said that one way to harmonize pillar one and two is to provide that pillar one applies only if companies are below a threshold level of income tax.

Marco Wagener, Chambre des Salaries, a Luxembourg worker rights organization, said the discussion should not only be about technicalities between company tax departments and tax collectors. This is a macroeconomic debate with significant political implications, he said. Wagener said that it is urgent to harmonize the tax bases and implement a minimum effective tax rate, first at the EU level and then among all countries. He said he wanted a transition period to give small exporting countries have time to adjust. Such countries often have few sales and a small labor headcount. He said that the Luxembourg green party has estimated that MNEs pay corporate income tax at only a 2 percent rate.

Tommaso Faccio, Independent Commission for the Reform of International Corporate Taxation (ICRICT), said the corporate tax is relied upon by developing nations and is needed to provide revenue. Faccio said he disagrees with those that call tax competition a zero-sum game. He said BEPS has exacerbated tax competition and now there is a proliferation of patent boxes. If we don’t move to a global minimum tax we risk corporation tax moving toward the bottom. He also said the current tax system causes competitive distortions between MNEs and companies that cannot take advantage of structures, like local businesses.

Roger Kaiser of the European Banking Federation said he is worried the OECD would go the same route as the US in the BEAT and include financial institutions. Financial institutions must comply with specific capital requirements which should be taken into consideration in developing the tax changes, he said.

Jari-Pekka Kaleva, European Games Developer Federation, said his group prefers pillar two over pillar one as the latter does not endanger data protection laws. Also, there has been a shift in countries from tax rate competition to tax services competition, he noted. He said that as countries help start-ups implement complex and global tax rules there will be more digital businesses and growth.

Scott A. Hodge, Tax Foundation, said that those countries that lower corporate tax rates are lowering the burden of a harmful tax. He said the incidence of the corporate tax falls on workers through lower wages and also on consumers as higher prices or on shareholders through lower returns. Reducing corporate tax reduces those burdens, Hodge said. He also said that the notion that corporations are not paying their fair share is false.

Pat Breslin, Breslin Consulting, said work must be done on how pillars one and two would coexist. He noted that some advocate for letting BEPS run its course before taking more action. He said that how effectively BEPS is working depends on how one interprets the BEPS transfer pricing revisions. He said some don’t see the changes as being as robust as others do. He said that while he has seen progress on accurately delineating transactions, some may not be placing sufficient focus on facts and circumstances when looking at DEMPE and value creation. He questioned those that think that “putting certain functions in certain places answers the question of value creation.”

Gary Sprague of the Digital Economy Group said that BEPS did a good job of base broadening. There is a need to articulate what problem pillar two is trying to address so that the solution can be identified. He noted problems identified so far include stopping the race to the bottom and addressing nowhere taxed income, limited risk distributors, and patent boxes. 

Johan Langerock of Oxfam said that a minimum tax is needed to curb harmful tax competition which has only gotten worse since the OECD’s 1998 harmful tax competition reports. The OECD and the Code of Conduct group have legitimized tax incentives that have lowered the tax rates for many companies, Langerock said. He said the pillar two proposals correct what has gone wrong for the last 20 years and will protect the tax bases of developing countries that have been suffering from base erosion. Citizens are demanding that corporates pay their fair share of taxes, he said.

Marlies de Ruiter of EY said that pillar two measures seem to go beyond tax avoidance but rather affect competition for real investment. The problem that needs to be solved must be clearly articulated and the pros and cons of the solutions must be presented clearly to political leaders, she said. She said that some of the problems identified by other speakers might be a problem of low substance, not low tax rates. Any solution should work for all – large, small and medium sizes countries; both capital import and export countries; and developed, developing, and emerging countries, she said. She also said a minimum tax could be distortive. For example, an MNE that produces and sells items would bear the minimum tax whereas a local producer would not. Englisch later disputed this last point, stating that in only in a few cases would there be countries with very low tax rates where large MNEs would be at a disadvantage over a local competitor. In reality, the problem is multinationals operating in large countries with high tax rates that are competing against local business and being able to exploit certain regimes to lower their taxes that the locals cannot exploit, Englisch said.

Carol Doran Klein of the USCIB said that for the minimum tax to work, both the base and the rate must be defined. If every country just defines the base, then the rate is meaningless because one could have a broad base with a low rate and another could have a tiny base with a very high rate. She said there is not enough time for countries to get together and decide on a common base. As such, she said the only way she could see the minimum tax to work, at least in the short term, would be to apply it on a foreign consolidated basis using ultimate parent financials and imposing tax on the ultimate parent company. Countries should agree to a single minimum rate applicable to all countries, Klein said. She also said that she supported a global computation of the minimum tax, not a per-country or per- item computation. There is a trade-off between precision and simplicity, she said. The USCIB also believes that foreign taxes should be fully creditable against the minimum tax. Also, she said that any minimum tax should be topped up, not taxed at the full parent rate. She said it would be very difficult to apply the rules on base eroding payments particularly when you must look through a chain of payments to see where the ultimate payment ends up. Given the complexity, this provision should be drawn as narrowly as possible and should not apply to ordinary course payments. Klein said the OECD could provide a white list that would limit the application of the rule when payments are made to entities in white list countries.

Francis Weyzig of Oxfam said that both pillar two proposals are needed. There will always be situations where one of the two rules does not apply. For example, if not all countries in the world adopt an income inclusion rule, in that case, you would need a backstop, he said. Weyzig also said there should be no exemptions for companies that have real economic activities. Weyzig said that a properly designed deduction limit rule should not gain a lot of revenue because behaviors would change. He also said adoption of the pillar two proposals might allow for removal of hybrid mismatch rules, interest deductions limits, or existing CFC rules. He said that measuring effective tax rates will be a challenge, especially for developing countries. A solution could be for the Forum on Harmful Tax Practices to develop white lists, he said. He said that countries should have a choice to adopt either the subject to tax rule or an undertaxed payment rule. The scope should be wide, he said, because there are many forms of base erosion payments. We need a minimum standard to cover these rules because they also protect other countries. He also said the minimum tax rate should be applied domestically as well.

Stephen Shay, speaking on his own behalf, explained that the tax on base eroding payments has two elements: the undertaxed payment rule, which rule would deny deductions for payments to related-parties if the payment was not subject to tax it at a minimum effective rate of tax and the treaty subject to tax rule, which would only grant certain treaty benefits if the item of income is sufficiently taxed in the other state. For the undertaxed payments rule, Shay said he believed that a 25 percent common ownership is reasonable for an entity to become subject to the rule. The issue is access to information, he said. Shay said that deductible interest and royalty payments should be included but not payments for services or cost of goods. He said the effective rate test should be based on a percentage of the rate in the payors’ country. He pointed out that the treaty subject to tax rule does not specifically say it is limited to related parties. Shay said that if pillar one is addressed then pillar two becomes far less significant. He said that BEPS did not achieve the goal of properly taxing remote taxpayers that derive value from a country without physical presence in a country. That includes, he said, not just digital activity but any use of a limited risk distributor to allow income to be earned by an entity outside the country. Regarding pillar one, he said that stability and certainty can only be addressed only by developing the significant economic presence test.

Edwin Visser, PwC, joined others in saying that it is too premature to adopt the pillar two proposals. Pillar two is not sufficiently targeted and is at odds with the BEPS project, he said. Visser said that double taxation is the most significant risk of the proposal. He said that PwC foresees unintended consequences such as countries offering cash grants instead of tax breaks. Visser said the need for simplification calls for the use of aggregate data to compute effective tax rates rather than the use of a country-by-country approach.

Séverine Picard, TUAC, said that the current tax system, which encourages companies to set up fragmented, complex, structures to make tax hard to track also makes employer liability hard to track. TUAC thus supports unitary taxation, Picard said. She said we should first devise income allocation rules, then go on and devise income inclusion rules.

Vanessa de Saint-Blanquat, MEDEF, said she is concerned that countries’ views on tax appear to be very divergent. That does not augur well for future simplicity, she said. Noting that the “ink is barely dry” on the BEPS work, she said that there are already enough anti-abuse rules. She said she worries about greater risks of double taxation in the future and said that dispute resolution should be a focus of this initiative.

Glenn Price, Vodaphone, said he is concerned about the efficiency of applying the tax on base eroding payments on a transaction-by-transaction basis. Coordination would be needed between the paying company and recipient company, particularly if the recipient was anticipating losses at year-end, he noted. Price also said there should not be withholding or other payments where losses are anticipated. He said that pillar two should be addressing payments artificially diverted to low tax countries or payments diverted to countries without substance. He said that the principal purpose test added to tax treaties through the BEPS process may address these same issues. He also suggested that countries should first adopt pillar one and, if it is not sufficient, then adopt pillar two.

Ed McNally, Keidanren (Japan Business Federation) agreed with Price that countries should first adopt pillar one and only adopt pillar two if pillar one is not sufficient. He said that a 50 percent ownership threshold should be required for the undertaxed payment proposal. There should not be much need for the income inclusion rules for countries that have robust CFC rules. He said that companies with substance should be excluded.

Dhruv Sanghavi, Maastricht University, said the subject to tax proposal could become problematic in situations that are triangular or multilateral.

Jesse Eggert, KPMG, said that if the purpose of the base eroding payment rule is to provide a top-up tax for the source country, this will create complexity concerning what is base erosion from a source country perspective. If the purpose is instead to be an incentive to get ultimate residence countries to adopt the income inclusion rule, that mitigates some, but not all, the complexity, he said. Calculating effective tax rates on payments from a source country perspective is a “nightmare” that would need to be re-lived for every country in which you make a payment, Eggert said. He said that implementation in the ultimate residence country would be much more administrable. Over the long term, if a company can determine that a payment is going to an entity that is fully subject to tax in its ultimate residence jurisdiction with an income inclusion rule that is compliant, that would solve a lot of the complexity, he said.

Nathaniel Carden, on his own behalf, said that the tax on base eroding payments needs ring-fencing. He said significant timing and character differences can exist with respect to the treatment of interest and royalties. We need to address those base and timing differences and, as was the case in BEPS action 2 on hybrid mismatches, make it clear what is in and out.

Elselien Zelle of said she hopes that companies that do pay their taxes are not impacted by these rules.

You can read a report on the “pillar one” proposals at this link.

Julie Martin

Julie Martin

Founder & Editor at MNE Tax

Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.

Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.

Julie can be reached at

Julie Martin
Julie can be reached at

Don't miss the latest tax and transfer pricing news! Sign up for our FREE newsletter

Be the first to comment

Leave a Reply

Your email address will not be published.