Fernway DiarySM

Mar 14, 2022

After a flurry of progress in the second half of 2021, the effort to achieve global tax reform has slowed, dimming the prospect that proposed changes will be enacted by 2023. As of November 4, 137 nations and jurisdictions around the world had signed onto the OECD/G20 inclusive framework on base erosion and profit shifting (BEPS), raising hopes that participating countries would move quickly to meet the Organization for Economic Cooperation and Development’s goal for plan implementation. However, it is unclear if participating jurisdictions will be able to pass necessary domestic legislation quickly enough to make such swift compliance possible.

The Two-Pillar Solution

The OECD’s plan seeks to address digitalization of the economy and corporation tax avoidance by reallocating the right to tax large multinationals from their home countries to market jurisdictions (pillar one) and setting a 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} global minimum tax (pillar two). This minimum tax would apply to companies with annual global revenues of €750 million or more, approximately $868 million. The purpose of the minimum tax is to eliminate the incentive for companies to offshore their profits to countries with a lower corporate tax rate; should they do so, they would face a “top up” tax in their home country to bring their taxes up to 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}.

The OECD released model rules designed to implement pillar two of the agreement in December 2021. This was followed swiftly by a European Commission proposal for a directive to implement the rules in all member states. In addition, in January the United Arab Emirates announced it would introduce a new 9{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} tax rate on corporate profits, applicable as of June 1, 2023. These early signs of progress are now giving way to uncertainty as it falls to signatories to enact tax rules that would bring them into compliance.

Challenges in Europe and the US

The difficulties of moving the global minimum tax from concept to reality reflect both the differing priorities of participating countries and the complexities of passing legislation to adopt the model rules. In the European Union, France has encouraged fellow member states to swiftly enact corporate minimum tax rules to bring them into compliance. Other EU countries such as Poland, Hungary, and Estonia have voiced concerns that progress on the minimum tax should be linked to progress on digital taxation, a European priority, fearing that moving too fast to adopt the US priority of a global minimum tax would erode leverage in future negotiations. Given that EU tax laws require unanimous support from all 27 member countries, internal disagreement could derail the chance of speedy legislative action.

In the meantime, the Build Back Better bill, which included provisions to bring the US into line with the new global minimum tax on large multinationals, failed to pass in December 2021. It is currently unclear when, or if, the bill will be reintroduced, or if its various provisions will be repackaged into different legislative proposals. If tax reform is not passed prior to the 2022 midterm elections, its future may be determined by whether the Democratic party is able to retain control of both houses of Congress.

While important, the cooperation of the EU and US is not the only factor in determining if and/or when the OECD plan is implemented. Other major world economies such as China, Brazil, and India will also play a key role in whether plans to reform global corporate taxation will succeed.

Monitoring Developments

While delays in the adoption of domestic legislation in countries that are part of the agreement may well push the implementation of a global minimum tax past the January 2023 goal, companies should still be preparing for its potential effects. Following developments from relevant jurisdictions, as well as consulting with an experienced tax professional to determine potential tax liabilities and necessary tax planning, can help ensure that changes do not take a business unaware.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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