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October 11, 2021
OECD releases statement updating July conceptual agreement on BEPS 2.0 project
On 8 October 2021, at the conclusion of a virtual meeting of the OECD1/G202 Inclusive Framework on BEPS (the Inclusive Framework), the OECD released a statement reflecting the agreement reached by 136 out of the 140 Inclusive Framework members on core design features of the two-pillar solution developed in the BEPS3 2.0 project (October Statement).
The October Statement describes agreed components with respect to both pillars of the project:
The October Statement builds on the statement released in July 2021, providing further specificity on several key parameters. In particular, the amount of residual profit to be re-allocated to market jurisdictions under Pillar One has now been set at 25% (as compared to 20-30% as provided in July) and the rate for the minimum tax under Pillar Two has now been agreed at 15% (as compared to “at least 15%” as provided in July). In addition, other thresholds, rates and administrative mechanisms are covered in the October Statement.
Additional substantive and technical details for key elements of both pillars have not yet been released, including revenue sourcing rules, adjustments for the tax base determination, design of marketing and distribution safe harbor rules, and dispute prevention and resolution rules for Pillar One; as well as rules to address timing differences, simplification mechanisms and transition rules for Pillar Two.
The October Statement includes an annex with further information on plans for implementation, providing generally for entry into effect in 2023, with the exception of the Pillar Two Undertaxed Payment Rule (UTPR) that is to enter into effect in 2024.
The G20 Finance Ministers are scheduled to consider the outcome of the Inclusive Framework meeting at their meeting in Washington on 12-13 October 2021.
In March 2018, the OECD released the document Tax Challenges Arising from Digitalisation — Interim Report 2018 as a follow up to 2015 final report on Action 1 of the project on Base Erosion and Profit Shifting. The 2018 Interim Report does not include any specific recommendations, indicating instead that further work should be carried out to understand the various business models operated by enterprises offering digital goods and services, as well as digitalization more broadly.4
In January 2019, the OECD released a Policy Note describing plans for renewed international discussions that were to focus on two pillars: one pillar addressing the broader challenges of the digitalization of the economy and the allocation of taxing rights, and a second pillar addressing remaining BEPS concerns.5 Following the Policy Note, in February 2019, the OECD released a Public Consultation Document6 describing the two-pillar proposals at a high level. The OECD received extensive comments from stakeholders and held a public consultation in March 2019.7
At the end of January 2020, the OECD released a Statement by the Inclusive Framework on BEPS on the Two-Pillar Approach. With respect to both pillars, the documents include new details on the proposed approaches and identify key issues under consideration and areas where more work is to be undertaken.8 In October 2020, the OECD released detailed reports on the Blueprints on Pillar One and Pillar Two, an Economic Impact Assessment of the Pillar One and Pillar Two proposals, a Cover Statement by the Inclusive Framework on the work to date and the next steps and a Public Consultation Document requesting comments on the Blueprints on both pillars.9
Most recently, on 1 July 2021, the OECD released a Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy (July Statement), reflecting the agreement of 130 of the member jurisdictions of the Inclusive Framework on some key parameters with respect to both pillars. At that time, nine members of the Inclusive Framework (Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, Peru, Saint Vincent and the Grenadines, and Sri Lanka) did not join the July Statement.10 Barbados, Peru and Saint Vincent and the Grenadines subsequently joined the agreement. At the end of August 2021, Togo joined both the Inclusive Framework and the July Statement.
On 8 October 2021, the OECD published a statement11 indicating that the Inclusive Framework has agreed on a two-pillar solution to address the tax challenges arising from the digitalization of the economy. 136 out of 140 jurisdictions of the Inclusive Framework have agreed to the October Statement. Estonia, Hungary and Ireland, which did not join the July agreement, have joined the October Statement. Pakistan, which joined the July statement, has not joined the October Statement. Kenya, Nigeria, and Sri Lanka did not join either statement.
The October Statement updates the July Statement regarding the conceptual agreement on fundamental reforms to international tax rules. The July Statement is described in detail in an EY Global Tax Alert (see endnote 10). Key updates included in the October Statement are outlined below:
The October Statement includes an annex with information regarding the implementation plan, including target dates.
According to the plan for Pillar One, Amount A will be implemented through an MLC, regardless of whether a tax treaty currently exists. Where necessary, Amount A will also be implemented by way of correlative changes in domestic law. The Task Force on the Digital Economy will seek to conclude the text of the MLC and its Explanatory Statement by early 2022 so that the MLC is open for signature by mid-2022. Jurisdictions will be expected to ratify the MLC as soon as possible after having signed it, with the aim for it to be in force and with effect from 2023. The Task Force on the Digital Economy will also develop model rules for domestic legislation by early 2022.
Pillar Two model rules and accompanying commentary will be developed by the end of November 2021. A model treaty provision to give effect to the STTR also will be developed by the end of November 2021. An MLI will be developed by the Inclusive Framework by mid-2022 to facilitate the implementation of the STTR in bilateral tax treaties. The model treaty provision will be supplemented by commentary that explains the purpose and the operation of the STTR. A process to assist in implementing the STTR will be agreed. By the end of 2022 at the latest, an implementation framework will be developed to facilitate the implementation of the GloBE rules.
2023 – Implementation of the Two-Pillar Solution
It is expected that the G20 Finance Ministers will endorse the outcome of the Inclusive Framework meeting at their meeting in Washington on 12-13 October 2021.
The October Statement marks an important milestone in the BEPS 2.0 project on fundamental changes to the global tax rules, with all OECD and G20 countries (including the European Union) now supporting the agreement on key parameters. However, more work will be required to reach agreement on some key design elements of the two pillars. In addition, there is significant work to be done to fill in the substantive and technical details in the development of the planned model rules, treaty provisions, and explanatory material. That work will need to be completed quickly in order to meet the timelines reflected in the implementation plan. It should be noted that while the October Statement provides that the work will continue to progress in consultation with stakeholders, the implementation plan provides limited time for policymakers to engage with businesses and other stakeholders. Therefore, companies that wish to provide input into the process should seek to engage now as the Inclusive Framework turns its attention to the next steps following the October Statement.
It is important for companies to follow these developments closely as they unfold in the coming months and to evaluate the potential impact of the global tax changes on their businesses, especially given the very ambitious implementation timeline. In addition, looking ahead, companies will need to monitor activity in relevant countries related to the implementation of these proposed rules through changes in domestic tax rules and bilateral or multilateral agreements.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young Limited (New Zealand), Auckland
Ernst & Young Solutions LLP, Singapore
Ernst & Young LLP (United States), Detroit
Ernst & Young LLP (United States), Global Tax Desk Network, New York
Ernst & Young LLP (United States), New York
Ernst & Young LLP (United States), Global Tax Desk Network, San Diego
Ernst & Young LLP (United States), Seattle
Ernst & Young LLP (United States), Washington, DC