IBFD- Tax Analysts Seminar

Implications of the OECD Global anti-base

erosion proposal (Pillar II)

Belema Obuoforibo

Ameya Kunte

David Stewart

Ridha Hamzaoui

Walter Andreoni

Mumbai, 4 December 2019

2

Context and background of the proposal

Essence of the proposal

Technical design of the proposal

Implementation issues including potential double

taxation

Tax policy issues

Questions and answers

Agenda

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Context and background of the proposal

8 November 2019: Consultation document

Comments up to 2 December 2019

Public consultation meeting to take place in

Paris in December 2019

Aims to address remaining BEPS issues

Prevention of profit shifting, harmful tax

competition, distorting tax incentives and

uncoordinated/unilateral measures

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Essence of the proposal

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Essence of the proposal

The four component parts of the Pillar II proposal are:

a) an income inclusion rule;

b) an undertaxed payments rule;

c) a switch-over rule; and

d) a subject to tax rule

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Parent

company

a- an income inclusion rule

Subsidiary

CountryA

Country B

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PE

that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate

Effective tax ratebelow minimum tax rate

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Parent

company

b- an undertaxed payments rule

Subsidiary

CountryA

Country B

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that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;

Effective tax ratebelow minimum tax rate

PAYM

ENTS

- No deduction- WHT

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Parent

company

c- a switch-over rule

CountryA

Country B

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PE

to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum rate; and

Effective tax ratebelow minimum tax rate

Exemption to credit

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Parent

company

d- a subject to tax rule

Subsidiary

CountryA

Country B

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a subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.

Effective tax ratebelow minimum tax rate

PAYM

ENTS

- WHT- Treaty benefits under A-B treaty

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Pillar Two

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Technical design of the proposal

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§ 13: tax base would be determined by reference

to the CFC rules or (in absence) the domestic CIT

rules of the Sh/s

All-in approach all subsidiaries’ taxable

income should contribute to the identification of

a minimum ETR

Challenges:

Differences among jurisdictions in calculating

the tax base

Timing differences

Different accounting rules

Tax Base determination – Chapter II

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Purposes: rely on unadjusted accounting figures may

“over” or “under” estimate net profits need of

adjustments

MAIN REASONS: Permanent and Temporary differences

Permanent differences: i.e. non deductible costs or non

taxable income (exemptions)

Temporary differences: difference in time for taking into

account income or expenses for tax purposes (i.e.

anticipated costs deduction or deferred taxable income

– anticipated taxable income or deferred costs

deduction)

Adjustments

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Program work identified “financial accounting”

as a starting point to simplify the identification of

the relevant taxable base to be used for the

calculation of the ETR

Financial accounting have to be adjusted

agreement to be found

Simpler way: rely financial accounting standards

used for other purposes

Parent accounting standards vs. Subsidiaries

accounting standards

Adjustments

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ETR needs as well to decide whether a blending

is necessary

Worldwide blending: aggregation of all foreign

income and foreign taxes

Jurisdictional blending: apportionment of

foreign income between different jurisdictions

Entity blending: determination of income and

taxes of each entity

Blending

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Determination of taxable base for GloBE purposes is

evidently difficult

Choice among different technicalities is a matter of

policy and reach of common consensus

Compliance for MNEs will evidently increase despite

the choice of the method

How the GloBE will interact with domestic CFC

regulations already in place?

Some remarks

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Implementation issues and potential

double taxation

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Example 1 - Income Inclusion Rule

ParentIncome Rate Tax

100 22% 22

Sub AIncome Rate Tax

60 10% 6

Sub BIncome Rate Tax

40 30% 12

TotalIncome Tax Rate

100 18 18%

GloBEIncome Rate Tax

60 5% 3

GloBEIncome Rate Tax

NIL NIL NIL

GloBEIncome Rate Tax

NIL NIL NIL

Jurisdictional / Entity Level Blending

Jurisdictional / Entity Level Blending

Worldwide Blending

GloBE Rate - 15%

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Example 2 - Income Inclusion Rule

ParentIncome Rate Tax

100 22% 22

Sub AIncome Rate Tax

60 10% 6

Sub BIncome Rate Tax

80 30% 24

Sub BXIncome Rate Tax

100 5% 5

GloBEIncome Rate Tax

60 5% 3

GloBEIncome Rate Tax

NIL NIL NIL

GloBEIncome Rate Tax

100 10% 5

Entity Level Blending Entity Level Blending

GloBE Rate - 15%

Entity Level Blending

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Example 2 - Income Inclusion Rule

ParentIncome Rate Tax

100 22% 22

Sub AIncome Rate Tax

60 10% 6

Sub BIncome Rate Tax

80 30% 24

Sub BXIncome Rate Tax

100 5% 5

GloBEIncome Rate

GlobeTax

60 5% 3

GloBEIncome Rate Tax

GloBETax

180 16% 29 NIL

Jurisdictional Level Blending

Jurisdictional Level Blending

GloBE Rate - 15%

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Example 2 - Income Inclusion Rule

ParentIncome Rate Tax

100 22% 22

Sub AIncome Rate Tax

60 10% 6

Sub BIncome Rate Tax

80 30% 24

Sub BXIncome Rate Tax

100 5% 5

GloBETotalIncome

Rate TotalTax

GloBETax

240 14.6% 35 1

Worldwide Blending

GloBE Rate - 15%

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Example 2 - Income Inclusion Rule

Blending Approach GloBE Tax

Entity Level Blending 8

Jurisdictional Level Blending 3

Worldwide Blending 1

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Blending Approach choices – arbitrage

Double taxation – application of income

inclusion rule and tax on base eroding payments

Other areas – CFC + GloBE, Linking Rules and

Ordering Rules, GAAP adoption

India inbound impact – largely sourced based

payments subject to Indian tax

India impact - Impact on new manufacturing

companies, IFSC, SEZ entities (depending

upon the floor rate)

India outbound impact

Some Thoughts

Tax policy issues

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Tax Policy Issues

• Will this be the end of tax competition?• Effects of Blending Method• Alternative Incentives

• Higher Tax Burdens

• Higher Compliance Burdens

• Alternatives• Revisit BEPS Action 3 – CFCs• Withholding Tax on Fees for Technical Services (UN Model Article

12A)• CCCTB (EU) or Single Sales Factor Apportionment (US States)• GILTI and BEAT (US)

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GILTI and BEAT

• Global Intangible Low-Tax Income• Applied to active income of CFCs• Reduced by 10 percent of tangible property• 50 percent inclusion with an 80 percent FTC• Results in an minimum Rate ~13 percent

• Base Erosion and Antabuse Tax• Targets outbound payments to related parties• Reduced rate of 10 percent is applied as an alternative

minimum tax• Calculation required if ratio exceeded and average receipts

exceed $500 million• Related party payments are added back into base

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