BEPS 2: From Pillar to Post
The internal tax divisions of multinationals and their international tax advisors have had a challenging few years. BEPS 1 brought us a raft of new compliance measures and now the BEPS 2 ‘pillars’ are on their way with even more. If you feel like you’re being driven from pillar to post ensuring your organisation meets its global tax compliance obligations, you are not alone!
The increased compliance burden on Significant Global Entities (groups with more than AUD1billion worldwide turnover) has had a material impact on their organisations. To meet their filing obligations around the world, SGEs have had to adapt their accounting systems, hire dedicated staff and utilise consultants to provide the prescribed information to revenue authorities. This has all come at a cost.
At a recent Transfer Pricing conference, a hard-working CFO posed a question to senior ATO representatives “Is what we provide useful?” She went on to say that she didn’t mind putting in the extra effort to give revenue authorities what they wanted (rather than concentrating on growing the business as she knew she should be) if the information was being utilised in a material way. Her comments struck a chord.
In Australia, SGEs now have to lodge Financial Statements with the ATO as well as Reportable Tax Position Statements for some public or foreign-owned large taxpayers. In addition, Australia has a specific local Transfer Pricing Manual requirement, Thin Capitalisation, the relatively new Multinational Anti-Avoidance Law (MAAL), plus Hybrid Mismatch rules and a Diverted Profits tax regime. All these measures came out of the initial OECD/G20 BEPS 1 (Base Erosion and Profit Shifting) project. Now coming down the track is BEPS 2, bringing even more far-reaching measures that international tax professionals will need to get on top of.
BEPS 2 has largely evolved out of a quest to deal with the global tax challenges arising out of the digitalisation of economy. The OECD believes that three phenomena facilitated by digitalisation present serious challenges to the global tax system: scale without mass, reliance on intangible assets, and centrality of data.
BEPS 2, which has 133 countries signed on (as of October 2021), will have an even bigger global impact than the initial BEPS 1. There are two pillars to BEPS 2 that have been developed after intensive consultation.
BEPS 2 Pillar One
Pillar One is directed at re-allocating taxing rights to the jurisdiction where the end-user is located. It entails a three-tier approach for a new profit allocation rule:
- Amount A – a share of deemed residual profit allocated to market jurisdiction using a formulaic approach ie a new taxing right
- Amount B – a fixed remuneration for baseline marketing and distribution functions based on the arm’s length principle
- Tax certainty – relief from double taxation.
A Multinational Enterprise (MNE) with a €20b turnover will be within the scope of Amount A across a broad industry range. Exclusions are currently planned for the extractive industry and regulated financial services industries.
For Amount A, MNEs between 20-30% of profit over 10% (PBT/revenue) will be reallocated to other market jurisdictions where there is a nexus. New special purpose nexus rules are planned.
There are lots of steps still to be completed in this process, but the plan is for implementation in 2023.
Given the high in-scope threshold for Amount A and exclusions, there may not be a major impact on Australian outbound businesses. That may not be the case on Amount B as we have already seen ATO activity using the MAAL legislation exploring marketing and distribution agreements and the issuing of the specific Practice Compliance Guideline (PCG 2019/1) covering inbound distribution arrangements.
BEPS 2 Pillar Two
Pillar Two is directed at ensuring multinational enterprises pay tax at an agreed minimum rate. This is quite an astonishing development. It is effectively the implementation of a global minimum tax – already agreed initially to be 15% – by the 133 countries signed up. This will be a multilateral process whereby tax impost will be equitably redistributed between countries where an MNE is operating.
Tax professionals love acronyms and Pillar Two has many. The proposed mechanics include:
- IIR – the income inclusion rule – operates as a top-up tax to the minimum rate (15%)
- UTPR – undertaxed payments rule – denies a deduction or impose source-based taxation for a related party payment.
- GloBE – global anti-base erosion which encompasses IIR & UTPR
- SOR – the switch-over rule – ensures the income inclusion rule also applies to Branches
- STTR – subject to tax rule, which will only grant treaty benefits if the income was subject to the minimum tax rate (15%).
At present, the in-scope turnover threshold for GloBE to apply is set at €750 million, similar to our Significant Global Entity threshold converted to AUD1billion. This Pillar will certainly have a broader impact, not just for Australian outbound but for many more inbound subsidiaries of SGEs.
Development of the rules under Pillar Two is underway with a target of 2022 to come into law and 2023 to be effective. This will also include work around how GloBE will integrate with individual countries domestic tax regimes. For example, it’s suggested that MAAL and other anti-avoidance rules, the Hybrids and Profit Diverted Tax regimes, will be removed.
Transfer Pricing and Country-by-Country reporting will stay.
These measures represent the biggest potential change to the international tax system since BEPS 1. We’ll keep you posted on how it all unfolds. Learn more about Accru Felsers international tax services or contact your local Accru Felsers office if you’d like advice on the implications of BEPS 2 for your business.