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OECD proposes international minimum business-tax rate

Monday, 11 November, 2019

The OECD has published draft proposals for a global minimum business-tax rate aimed at preventing multinationals, especially in the digital economy, moving their profits into low-tax jurisdictions.

The so-called Pillar Two proposal is part of the OECD's base erosion and profit shifting (BEPS) initiative. It would give third countries extra rights to tax a multinational group's foreign branch or controlled entity, if the company's jurisdiction of domicile does not apply taxes at the minimum level. This 'income inclusion rule' would be backed up with an 'undertaxed payment rule' to deny a deduction or impose source-based taxation, such as a withholding tax, on payments to a related party that are not subject to tax at a minimum rate.

A switch-over rule would also be introduced into tax treaties to permit a residence jurisdiction to switch from an exemption to a credit method, if the profits attributable to a permanent establishment, or derived from immovable property outside it, are subject to an effective rate below the minimum rate. A further rule would subject a payment to withholding or other taxes at source, or remove its eligibility for treaty tax relief.

The draft proposal has emerged from a collaboration of more than 130 countries, the Inclusive Framework on BEPS, formed in January 2019 to develop ideas on a ‘without-prejudice basis.’ Accordingly, it does not represent a consensus view of these countries, but only a first draft to invite feedback. The level at which the minimum tax rate will be set is to be discussed by the participating countries once the proposal's other key elements are fully developed.

Comments are requested by 2 December. The OECD has particularly welcomed views on three aspects of the plan:

  • the use of financial accounts as a starting point for determining the tax base;
  • the extent to which a multinational enterprise can combine income and taxes from different sources in determining the effective (blended) tax rate on such income; and
  • stakeholders' views on any carve-outs and thresholds that might be considered as part of the proposal.

Draft proposals for the first 'pillar' of the BEPS programme, addressing the allocation of taxing rights between jurisdictions, and new profit allocation and nexus rules, were published in early October. The consultation on that document ends tomorrow (12 November).

'The proposals under Pillar Two represent a substantial change to the tax architecture and go well beyond digital businesses or digital business models', commented accountancy firm EY. 'These proposals could lead to significant changes to the overall international tax rules under which multinational businesses operate.'

Sources