The OECD is working on rules that will give businesses a clearer picture of how nearly 140 countries can levy a global minimum tax rate of 15%.
The rules – or model legislation – will serve as a guide for governments to implement the 15% rate nationally as part of a broader October 8 agreement to revise global tax rules. For tax advisers, the legislation could answer long-awaited questions about how exactly the 15% levy will affect tax bills and how to comply.
The two-part deal, negotiated by the Organization for Economic Co-operation and Development, will reallocate some of the profits of the largest multinationals, known as pillar one, and create the 15% rate, known as pillar two. Officials need to finalize the technical details on the two pillars: creating treaties, model legislation and other tools that countries will need to change their national laws and join global agreements in the years to come.
Second pillar legislation, which the OECD said in October would be ready by the end of this month, will be implemented almost immediately. The EU has announced that it will issue a directive at the end of December outlining how all member states should adopt minimum tax rules.
“Now, for me, is the start of the next phase of the process and an implementation phase where we’re really looking for these much more detailed design elements from a tax technical perspective,” said Monika Loving, Managing Partner, International Taxation. at BDO in Atlanta.
Fill in the details
Businesses look to future model second pillar legislation to answer technical questions about how the rules work, to enable them to calculate in more detail their effective tax rate in each jurisdiction to see if and where the minimum tax is. will touch them, Bart said. Le Blanc, partner of Norton Rose Fulbright in Amsterdam.
The rules of the model are “the starting point for everyone to really do the analysis,” he said.
More details on the new rules and requirements will also give businesses a clearer idea of what information they will need to collect to comply, which may require internal changes.
“Companies will need to gather a lot of additional data points and adapt their internal processes and systems at an early stage, and certainly well before the rules apply,” said Marlies de Ruiter, international tax policy manager at EY.
The United States already has some form of minimum tax – known as GILTI – but for governments around the world it will be a new system, said Will Morris, deputy head of global tax policy at PwC.
“While the concept is pretty easy to understand – you have a minimum tax, okay, we understand that – you do it country by country, which obviously makes things more complicated,” he said. “It’s actually the working mechanisms that are crucial. ”
One of the biggest questions the model’s rules can answer is how the new system will deal with timing differences – the difference between financial reporting and taxable income, or when a business reports something and when it pays taxes. above.
These details will help answer questions such as how the rules will deal with depreciation or impairment of assets.
The rules in the model can clarify the system that the second pillar will use to manage temporary differences: accounting for deferred taxes, loss carryforwards, or something that combines elements of both approaches.
The model rules will focus on two elements of the second pillar. The main element of the plan, known as the Income Inclusion Rule or RII, allows a country to top up a business’s tax at the minimum rate when it is not paying enough in another jurisdiction. The under-taxed payments rule is designed as a safety net if the company’s home country does not apply the IIR.
A third element of the minimum tax agreement, the tax liability rule, aims to allow developing countries to apply a minimum withholding rate under treaties. The OECD’s October implementation plan indicated that a model convention provision for the tax liability rule would be developed by the end of November.
The OECD declined to comment.
The second pillar will have global ramifications, but many US-headquartered companies are more immediately concerned about potential changes to the US global minimum tax, known as GILTI, which is part of the spending and tax program that the Democrats are now trying to push through.
The proposed changes would increase the GILTI rate and apply the minimum tax on a country-by-country basis, rather than on a company’s overall tax rate. These two changes bring the US rules much closer to the OECD agreement.
“Nothing is guaranteed until they agree that GILTI is a pillar two compliant plan,” Morris said.
The OECD model rules are unlikely to say much, if anything, about GILTI while legislation is pending, practitioners said. But if GILTI’s changes are not implemented and the regime is not seen as an acceptable substitute for global minimum tax rules, U.S. businesses could be faced with two sets of minimum tax rules.