Pillar One and Pillar Two: Where We Are Now
It seems that the global tax initiatives are in full speed now as so many tax developments are in progress. Some of them were recently summarized during OECD tax talks held in February 2023.
The February OECD talks covered an update on the status of global tax initiatives like Pillar One and Pillar Two, G20 developments, ongoing efforts to enhance tax certainty as well as recent developments in international VAT/GST, and the launch of the Inclusive Forum on Carbon Mitigation Approaches. In addition, the ongoing tax and development work and capacity building efforts were summarized.
As stated during OECD tax talks, there is lot of progress on both pillars.
In the OECD’s Pillar One proposal, Amount A represents a fundamental re-ordering of the global tax system. These intense negotiations of the multilateral convention are well underway, and the aim is still to sign the Convention in mid-2023.
Regarding Amount B, the public consultations to the main design elements of Amount B (which was released in December 2022) resulted in roughly 1,000 pages of input.
As the application of the arm’s length principle to in-country baseline marketing and distribution activities, Amount B is intended to be simplified and streamlined, with a particular focus on the needs of low-income countries (according to IF Statement, 2021). The key benefits of Amount B pointed out during OECD tax talks refer to clear scoping criteria for taxpayers that would qualify for Amount B, simpler pricing methodology where Amount B applies, low-capacity jurisdictions with no comparables or databases available can use Amount B and MAP as an alternative solution to extensive, time-consuming discussions on comparables.
Pillar Two is, of course, the global minimum tax, and many countries have embraced the concept. The OECD estimates that over 90% of the global multinationals with the revenue above the threshold of €750 million will be subject to the minimum tax by 2025. Like all 27 EU member states, other countries have also joined the initiative and taken steps to implement the new rules. Australia, UK, Canada, UAE, Switzerland, South Africa, Hong Kong, and Japan are just a few examples. The OECD is working also on finalizing the Multilateral Instrument on the subject to tax rule (STTR) to help developing countries protect their tax base.
The OECD also shared the economic impact of the Two Pillar solution. As regards to Pillar One, it seems that low- and middle-income jurisdictions gain more than high-income jurisdictions as a share of the existing CIT revenues. On the other hand, investment hubs tend to lose. It has been observed that specific design features have the core impact and are responsible for the largest portion of the new income for low-income jurisdictions.
The works of Pillar One and Pillar Two are very complex as they include detailed features resulting in challenges for OECD, tax authorities, legislation bodies around the globe and taxpayers. There are still public consultations in place in this area and the final result may still evolve.
And the Two-Pillar Solution is not the only tax development that is in progress. As it has been indicated during G20 meeting in Bengaluru on the tax plate we have now:
- Pillar One: The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting is working on Pillar One, and the Multilateral Convention is still aimed to be signed in the first half of 2023.
- GloBE: The release of the GloBE Implementation Framework, which facilitates implementation of GloBE Rules as a common approach.
- Pillar Two/ STTR: The Inclusive Framework covering the negotiations on the Subject to Tax Rule (STTR) under Pillar Two focuses on its implementation, including the development of a Multilateral Instrument.
- Developing Countries: The 2022 G20/OECD Roadmap on Developing Countries and International Taxation is expected to be updated.
- Exchange of Information: The Global Forum on Transparency and Exchange of Information for Tax Purposes has been notified to update the G20 on the implementation of the roadmap in its 2021 Strategy on Unleashing the Potential of Automatic Exchange of Information for Developing Countries. This includes efforts made to encourage such jurisdictions to adopt the Automatic Exchange of Information (AEOI) framework under the Common Reporting Standard (CRS).
- Crypto-assets Reporting: The OECD to conclude the work on the implementation packages concerning the Crypto-Asset Reporting Framework and amendments to the CRS.
Obviously, a global tax revolution is on its way. The number of new developments and their complexity may be overwhelming as is the implementation for both MNEs and tax authorities. The global solution should be carefully observed but most important will be the local implementation rules. Let’s buckle up as the ride is full of challenges.