On December 2, TEI filed comments responding to the OECD's public consultation document titled Global Anti-Base Erosion Proposal ("GloBE") - Pillar Two, focusing on the need for states to withdraw unilateral measures, a strong binding dispute resolution mechanism, and clear ordering rules, among other things. TEI's comments were prepared under the aegis of its European Direct Tax Committee, whose co-chairs are Kris Bodson of Johnson & Johnson and Giles Parsons. Benjamin R. Shreck, TEI tax counsel, assisted in preparation of the Institute's comments.
The OECD launched its base erosion and profit shifting (BEPS) project in 2013. Action 1 of the BEPS project was entitled Addressing the Tax Challenges of the Digital Economy. The OECD published a final report under Action 1 on 5 October 2015 (the Final Report). (1) The Final Report concluded in part "because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes." (2) The Final Report noted the OECD would continue to monitor developments in this area, along with implementation of the other BEPS actions, with a view toward producing a follow-up report on the digital economy in 2020. (3)
Subsequent developments and substantial political pressure, however, have overtaken the "wait and see" approach of the Final Report. Since issuing the Final Report, the OECD has published: (i) an interim report entitled Tax Challenges Arising from Digitalisation on 16 March 2018; (ii) a policy note, entitled Addressing the Tax Challenges of the Digitalisation of the Economy on 23 January 2019; (iii) a public consultation document, also entitled Addressing the Tax Challenges of the Digitalisation of the Economy on 13 February 2019; (iv) a document entitled Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy (Programme of Work), on 31 May 2019; (v) a public consultation document entitled Secretariat Proposal for a "Unified Approach" under Pillar One on 9 October 2019; and, most recently, (vi) a public consultation document entitled Global Anti-Base Erosion Proposal ("GloBE") - Pillar Two (the Consultation Document) on 8 November 2019. The OECD also held public consultations in Paris in March and November 2019.
The Consultation Document invites interested parties to comment on the technical design aspects of the GloBE no later than Monday 2 December 2019 at 18:00 (CET). I am pleased to respond to the OECD's request for comments on behalf of Tax Executives Institute, Inc. (TEI).
TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organization has 57 chapters in Europe, North and South America, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting sound tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 individual members represent over 2,800 of the leading companies in the world. (4)
The Consultation Document presents the OECD's preliminary approach to Pillar Two, which "calls for the development of a co-ordinated set of rules to address ongoing risks from structures that allow [multinational enterprises (MNEs)] to shift profit to jurisdictions where they are subject to no or very low taxation." (5) The Document sets forth an ambitious and complex approach for implementing a GloBE and yet leaves many questions unanswered.
The OECD is under tremendous political pressure to deliver a timely solution to the tax challenges of the digital economy and related issues, as outlined in the Programme of Work. However, implementation of a complex global minimum tax (i.e., the GloBE) addressing base erosion issues seems premature while the 15 BEPS action items addressing base erosion and profit shifting continue to be implemented. A premature approach will result in MNEs suffering double, triple (or more) taxation, particularly if the OECD delivers a "consensus" solution in 2020. TEI therefore recommends, as an alternative, an initial implementation phase where the GloBE only applies to profits received from harmful tax regimes, as defined under BEPS Action 5. This could be accomplished by listing certain jurisdictions as engaged in harmful tax practices and/or listing specific harmful tax practices subject to a GloBE. This preliminary approach could be revisited later to determine whether a more comprehensive GloBE is warranted, especially in light of further worldwide implementation of the BEPS action items.
TEI also has the following additional general comments:
All implemented and proposed unilateral tax measures (e.g., digital services taxes, multi-national anti-avoidance laws, diverted profits taxes, equalization levies, and offshore receipts in respect of intangible property taxes) should be withdrawn as a condition of agreeing to the OECD's Pillar One and Pillar Two proposals. The purpose of the OECD's renewed work on the tax challenges of the digitalization of the economy would be unclear if these unilateral measures remained in place after an agreement was reached.
The OECD should develop a general framework before diving into a further detailed discussion of implementing a GloBE under Pillar Two. Such a framework would need to have an agreement on what components of a GloBE are necessary and how they would interact with each other and with existing legislation. Similarly, criteria should be developed for determining what (if any) existing legislation, such as the U.S. global intangible low-taxed income (GILTI) regime, may be grandfathered (or deemed "GloBE-compliant") and what unilateral measures can or should be reversed before introducing any of the new GloBE components.
The OECD has previously stated the corporate income tax is the worst kind of tax from an economic growth perspective. Accordingly, the scope of Pillar Two should be limited and the minimum tax rate low to minimize the negative effects on cross-border trade and investment. The OECD's most recent report on the outlook for the global economy, for example, called for growth-enhancing measures. (6) The GloBE proposal would, in contrast, be a growth-depressing measure.
U.S. companies are subject to the GILTI regime, which imposes a minimum tax on "deemed" global intangible income (and thus encompasses far more than intangible income). The GILTI regime should be treated as an income inclusion rule under any final OECD guidance and there should be no need to impose additional rules on companies subject to GILTI.
The Consultation Document proposes four sets of rules: (i) an income inclusion rule; (ii) an undertaxed payments rule; (iii) a switchover rule; and (iv) a subject to tax rule. However, much of the focus of the Document, as well as this letter, is on a worldwide inclusion regime at an MNE's parent company level. A global solution of this type simplifies tax administration and compliance and should address many of the issues necessitating the implementation of the GloBE. The other three rules may encourage policies addressing the perception of low-taxed income at an intermediate holding company or subsidiary level, creating additional taxes at those levels even if the MNE has an overall effective tax rate above the minimum GloBE rate.
Any final guidance from the OECD on the four rules set forth immediately above should include clear and consistent co-ordination and ordering guidelines to avoid double taxation. TEI recommends the income inclusion rule apply at the parent company level and take priority over the undertaxed payments and subject to tax rules. The OECD at a minimum should clearly state which rules under Pillar Two take precedence over the other rules.
The scope of the undertaxed payments and subject to tax rules should be limited to payments related to "mobile" income (e.g., interest and royalties). Other payments (e.g., by distributors to acquire inventory which they on-sell) should be out of the scope of these rules.
Although the undertaxed payments rule is limited to payments to related...