Executive summary

On 11 May 2023, the OECD published a Progress Report (the Report) for the G7 Finance Ministers and Central Bank Governors’ May 2023 meeting, which follows up on the OECD’s May 2022 report by outlining progress on tax cooperation and identifying potential new areas for future consideration. The Report describes how the principles set out in the 2022 report are being incorporated into the design of Pillars One and Two under the so-called BEPS 2.0 project and how these principles are being translated into action. It also discusses capacity-building developments and plans.

The G7 Finance Ministers and Central Bank Governors met in Japan on 11-13 May 2023. After the meeting, the G7 Presidency issued a communiqué summarizing key topics discussed. Concerning international taxation, the Finance Ministers reaffirm their strong political commitment toward the swift global implementation of Pillars One and Two. The communiqué acknowledges the significant progress in the negotiation of the Pillar One Multilateral Convention (MLC) and reaffirmed the Finance Ministers’ commitment to swift completion of the negotiations so that the MLC is ready for signature within the agreed timeline. The communiqué welcomes the progress in implementing Pillar Two into domestic legislation and calls on the Inclusive Framework to work on further administrative guidance for globally consistent implementation. The communiqué also indicates their intention to support developing countries in strengthening their tax capacity to build sustainable tax revenue sources and highlights the importance of assistance for the implementation of Pillars One and Two.

Detailed discussion

2023 Progress Report on Tax Co-operation for the 21st Century

On 11 May 2023, the OECD published the Report for the G7 Finance Ministers and Central Bank Governors’ May 2023 meeting, which is a follow-up to its May 2022 report and contains three main sections: (i) corporate tax landscape, (ii) beyond corporate tax, and (iii) implications for developing countries.

Corporate tax landscape

The 2022 report set out a set of principles aimed at achieving a streamlined, collaborative and digital administration of common international tax rules. This section of the 2023 Report describes how the reforms developed in the BEPS 2.0 project align with these principles.

The “one-stop shop” principle aims to minimize the compliance burden on taxpayers. The Report indicates that this will be incorporated into the Pillar Two rules, noting that the standardization that follows from the global nature of these rules presents opportunities for coordinated information returns and compliance actions. According to the Report, an example of this coordination is the Global Anti-Base Erosion (GloBE) Information Return, which will streamline the filing process by allowing submission only once across implementing jurisdictions. Similarly, the Report describes the October 2021 Progress Report on the Administration and Tax Certainty Aspects of Pillar One as streamlining the process for filing the Amount A Tax Return.¹ The Report also notes that the one-stop-shop principle extends beyond the BEPS 2.0 project, as it is reflected in initiatives such as the Bilateral Advance Pricing Arrangement Manual ² and the Manual on the Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements.³

The Report states that the principle of “fully enabled digital communication” is also incorporated in Pillar Two. This is intended to be reflected through a dedicated Extensible Markup Language (XML) schema, along with centralized filing requirements and automated information exchanges facilitated by the GloBE Information Return. The Report notes that fully virtual meetings will be the foundation for further cooperation under the Pillars One and Two. To this end, the Report indicates that work is underway to develop a common platform for communication and collaboration between tax administrations and taxpayers, with the goal of making this platform operational by 2024.

The Report indicates that the “collaborative approach with central project management and an active role for the taxpayer” principle is reflected in the proposed dispute-prevention and dispute-resolution mechanisms for Amount A of Pillar One. This tax certainty framework relies on coordinated efforts among tax administrations, directed by the lead tax administration. Additionally, the framework includes participation from representatives of other tax administrations to assess the taxpayer's requests for certainty.

Moreover, the Report describes the “common and synchronized risk assessment” principle as a key feature of the certainty process for Amount A of Pillar One. It notes that this principle is also reflected in the December 2022 public consultation document on Pillar Two and tax certainty,⁴ which discusses the potential to draw on the successful practices of the International Compliance Assurance Programme (ICAP). According to the Report, the ICAP experience shows that a common approach promotes greater certainty, reduces duplication for both tax administrations and multinational enterprise groups, and facilitates peer learning among tax administrations.

The Report indicates that the “coordinated inquiries and actions to address identified risks” principle is reflected in the comprehensive certainty review process being developed for Amount A under Pillar One, which it characterizes as a proxy for audit. Regarding Pillar Two, the Report notes that a coordinated framework for further information requests with respect to risks identified through the GloBE Information Return could be developed. Furthermore, the possibility of conducting simultaneous audits under the Convention on Mutual Administrative Assistance in Tax Matters has been considered.

According to the Report, the principle of “early and binding resolution” is reflected in the certainty processes being developed for Pillar One Amount A, which are intended to provide timely and binding certainty for taxpayers. The Report also indicates that for Pillar Two, which is to be implemented through domestic law, innovative solutions for dispute resolution are being considered.

Lastly, the Report addresses the principle of “no duplicative requirements,” indicating that this principle is reflected in the design of Amount A of Pillar One, which mandates removal of alternative measures aimed at achieving similar objectives such as digital taxes. The Report also notes that attention in the BEPS 2.0 project is now turning to consideration of duplicative requirements and matters of administrative simplification.

Beyond corporate tax

The 2022 report addressed the significance of the Exchange of Information for tax administrations and the ongoing shift from relying on third-party information to accessing real-time data. This section of the 2023 Report provides an update on the recent developments in this area.

The Report outlines the latest developments in the Crypto-Asset Reporting Framework (CARF) and the related amendments made to the Common Reporting Standard (CRS).⁵ According to the Report, efforts to create an implementation package ensuring consistent domestic and international application and effective implementation of the CARF and the amended CRS are nearing completion.

The Report also indicates that the OECD has continued to expand other initiatives related to cross-border information exchange, including the Model Rules for Reporting Platforms Operators concerning Sellers in the Shared and Gig Economy.⁶ Since November 2022, 25 jurisdictions have signed the multilateral competent authority agreement to facilitate the international exchange of information based on these Model Rules. The Report further states that jurisdictions around the world remain committed to ensuring effective enforcement of the CRS, noting that, since November 2022, 17 jurisdictions have signed the multilateral competent authority agreement to facilitate the international exchange of information based on the Model Mandatory Disclosure Rules on Common Reporting Standard Avoidance Arrangements and Opaque Offshore Structures.

This section of the Report also includes two case studies on how Hungary and Japan are using CRS to facilitate compliance risk management projects.

Implications for developing countries

As part of the ongoing international tax agenda, substantial efforts have been dedicated to meeting the needs of developing countries and facilitating capacity building. This section of the Report provides an update on the various workstreams that the OECD has undertaken in this regard.

According to the Report, the OECD Secretariat has initiated a series of nine pilot programs aimed at assessing the impact of Pillar Two on tax incentives. These programs involve the collaboration of experts who will help countries understand how the design of tax incentives interacts with the implementation of Pillar Two. In addition, the Platform for Collaboration on Tax (PCT), a joint initiative by the International Monetary Fund, United Nations, World Bank Group and OECD, will continue working in this area, including by updating the toolkit on tax incentives to reflect the implications of Pillar Two.

The Report also describes capacity building to support countries in addressing challenges related to implementation of Pillars One and Two. This support can include offering training initiatives, developing model legislation, providing handbooks, drafting guidance materials and providing advice in reviewing draft legislation. Support in the administration of the rules can include ensuring that developing countries have access to the relevant data.

In addition to the tax challenges posed by Pillars One and Two, the Report indicates that other priorities for developing countries include broader challenges associated with digitalization. In this regard, the Report notes that the OECD has launched a comprehensive capacity-building program focused on addressing the Value Added Tax (VAT) challenges associated with the growth of e-commerce and digital trade, with three regional VAT digital toolkits developed in partnership with the World Bank and regional organizations. In 2022, bilateral assistance was extended to more than 20 developing countries, with plans for further expansion in 2023.

G7 Finance Ministers and Central Bank Governors communiqué

The communiqué issued at the close of the meeting of the G7 Finance Ministers and Central Bank Governors includes a statement on the progress in the negotiation of Pillar One and further work under Pillar Two of the BEPS 2.0 project:

We re-emphasize our strong political commitment towards the swift global implementation of the OECD/G20 Inclusive Framework Two-Pillar Solution to address the tax challenges arising from globalization and the digitalization of the economy and to establish a more stable and fairer international tax system. We recognize significant progress in the negotiation of the Pillar 1 Multilateral Convention (MLC) and reaffirm our commitment to the swift completion of the negotiation so that the MLC can be ready for signature within the agreed timeline. We welcome the progresses in domestic legislation toward the implementation of Pillar 2 and call upon the Inclusive Framework to work on further administrative guidance for a globally consistent implementation. We will further provide developing countries with support for strengthening their tax capacity to build sustainable tax revenue sources, highlighting the importance of assistance for the implementation of the Two-Pillar Solution. We welcome the OECD’s “2023 Progress Report on Tax Co-operation for the 21st Century.”

Implications

The BEPS 2.0 project involves reforms that would reshape the international tax architecture under which multinational businesses operate. The G7 Finance Ministers have reiterated their political commitment to swift global implementation of these reforms. However, there is still significant work to be done within the Inclusive Framework to address technical details and administrative matters. Even as this work continues, the implementation process for Pillar Two is underway in countries around the world.

As evidenced by the Report, the future of international tax cooperation is evolving, with a focus on adopting common, collaborative and digitally enabled approaches. Multilateral efforts are underway to enhance the administration of international tax rules, not only for corporate income tax but also beyond. This includes the implementation of real-time information collection systems. Moreover, tax administrations are increasingly deploying digital tools.

These trends underscore the importance of staying up-to-date with advancements in tax policy and administration. Companies should closely monitor developments in the global negotiations and in relevant countries and assess the potential impact for their business.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP

• Marlies de Ruiter | marlies.de.ruiter@nl.ey.com
• Maikel Evers | maikel.evers@nl.ey.com
• David Corredor Velasquez | david.corredor.velasquez@nl.ey.com
• Roberto Aviles Gutierrez | roberto.aviles.gutierrez@nl.ey.com

Ernst & Young LLP (United States)

• Barbara M. Angus | barbara.angus@ey.com
• Jose A. (Jano) Bustos | joseantonio.bustos@ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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ENDNOTES

¹ See EY Global Tax Alert, OECD releases public consultation document on administration and tax certainty aspects of Amount A of Pillar One, dated 21 October 2022.

² See EY Global Tax Alert, OECD publishes Manual on Bilateral APAs, dated 5 October 2022.

³ See EY Global Tax Alert, OECD publishes Manual on Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements, dated 23 February 2023.

⁴See EY Global Tax Alert, OECD releases consultation document on tax certainty for the Pillar Two GloBE rules, dated 22 December 2022.

⁵See EY Global Tax Alert, OECD publishes final Crypto-Assets Reporting Framework and amendments to Common Reporting Standard, dated 17 October 2022.

⁶ See EY Global Tax Alert, OECD releases model rules for data reporting by platform operators for sellers in the sharing economy, dated 8 July 2020.