Public consultation document released on global anti-base erosion proposal

On 8 November 2019, as part of the ongoing work of the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting (“Inclusive Framework”), the OECD released a public consultation document on the Global Anti-Base Erosion Proposal – Pillar Two. This follows on from the programme of work issued on 31 May 2019, and is designed to strengthen countries’ ability to tax profits where income is locally subject to a low effective rate of tax.

The consultation document does not, at this stage, have consensus political support from the more than 130 governments participating in the G20/OECD Inclusive Framework.

Global anti-base erosion proposal

As described in the program of work, the global anti-base erosion (or “GloBE”) proposal would enable countries to tax profits that would otherwise be taxed at an effective rate below a “minimum rate.” The proposal will operate as a top-up to an agreed fixed minimum rate. It consists of two interrelated elements, incorporating four component parts:

  • Income inclusion:

- An income inclusion rule that would tax the profits of a foreign controlled entity or branch if that profit was subject to a low effective tax rate; and

- A switch-over rule that would turn off the benefit of exemption (in favour of a credit method) in the case of profits attributable to exempt foreign branches or income derived from foreign immovable property subject to an effective tax rate below the minimum rate.

  • Tax on base-eroding payments:

- An undertaxed payments rule that would deny a deduction, or impose source-based taxation (including withholding tax), for a payment made to a related party unless those payments were subject to tax at a minimum effective rate; and

- A complementary subject to tax rule that would subject a payment to withholding or other taxes at source and deny treaty reliefs otherwise available to undertaxed payments.

Comments are welcomed on all parts of the proposal as set out in the programme of work. Comments are specifically requested on three technical design aspects: on the use of financial accounts; on the blending of low-tax and high-tax income; and on possible carve-outs and thresholds.

Tax base determination: The use of financial accounts as a starting point for determining the tax base under the proposal

Consideration is given as to whether using financial accounts, subject to agreed adjustments, could provide an appropriate base for measuring income and could simplify and reduce the compliance costs of the proposal. Views are sought on the use of the accounting standard of the ultimate parent entity instead of the local GAAP of each entity, and on the acceptability of different standards. Consideration also would need to be given to cases where consolidated financial statements are not prepared for any other purpose.

Recognising that accounting profits may differ significantly from taxable profits, the document considers adjustments to accounting profit that could be required.

Views are sought on the types of material “permanent differences” between financial accounting income and taxable income that may need to be removed from the tax base.

It is noted that “temporary differences”—such as differences between the timing of accounting depreciation and tax relief on capital expenditure, or the carry forward of losses—have distortive effects on effective tax rates that typically reverse in future years. Three basic approaches are described that could address the effects of temporary differences:

  • Carryforward of excess taxes and tax attributes;
  • The use of deferred tax accounting; and
  • Multi-year averaging.

Comments are sought on the advantages and disadvantages of each approach.

Blending: The extent to which a business can combine low-tax and high-tax income when calculating its effective tax rate/rates

Blending can be done on a narrow or broad basis and three approaches are described:

- A worldwide blending approach: Requiring a business to aggregate its total foreign income and total foreign tax. Where the tax on the total foreign income was below the minimum rate, additional tax would be due.

- A jurisdictional blending approach: Requiring businesses to aggregate amounts on a jurisdiction-by-jurisdiction basis, paying additional tax in respect of the income in those jurisdictions effectively taxed below the minimum rate.

- An entity blending approach: Requiring the calculation of income, taxes and effective tax rates of each individual group entity (and foreign branch).

The consultation document also describes the possibility of “local group blending”—a variation of the entity blending approach that would allow for the results of entities within a local tax consolidation or local group relief regimes to be aggregated.

Each approach has different policy implications and implementation challenges, and views are sought on the interactions between each approach and managing effective tax rate volatility; obtaining the required level of financial accounts data; allocating income between branches and head offices; the treatment of tax transparent entities (e.g. partnerships); crediting taxes arising in other jurisdictions (e.g. tax arising under controlled foreign company (CFC) rules); and the treatment of dividends and other distributions.

Carve-outs and thresholds

Carve-outs to be considered include those for regimes compliant with standards of BEPS action 5 on harmful tax practices and other substance-based approaches, a return on tangible assets and for controlled corporations with related party transactions below a certain threshold. Carve-outs may be based on a qualitative overall evaluation of the facts and circumstances, or based on more quantitative objective criteria—e.g. based on formulas.

Other related matters under consideration include using thresholds based on the size of the group, de minimis thresholds to exclude smaller transactions or entities and the appropriateness of carve-outs for specific sectors or industries. Views are sought on which options should be adopted or avoided.

Next steps

Comments on the consultation document are invited by 6:00 pm CET on 2 December 2019. A public consultation meeting will be held on 9 December.

It is anticipated that a further public consultation will be issued in respect of the mechanics and operation of the undertaxed payment rule and the nature and scope of the subject to tax rule once the G20/OECD Inclusive Framework has developed a clearer outline of these rules.

The OECD hopes that political agreement on the architecture of both the global anti-base erosion proposal and new nexus and profit allocation rules (Pillar One of the program of work) can be reached by June 2020.


The consultation document considers some of the challenges and complexities discussed in the public consultation meeting held in March 2019. It is clear that many significant issues have yet to be resolved and while some of the challenges are explored in more depth (such as the need to identify a common tax base and consideration of the use of accounting information to achieve this) there is limited additional detail on the proposal to be taken forward. The consultation document acknowledges that many of the technical and design aspects of the proposal depend on policy choices to be agreed by the more than 130 countries that make up the G20/OECD Inclusive Framework.

No agreement has yet been reached on the key issue of setting the effective minimum rate. A rate of 15% is included in some examples, but the OECD Secretariat makes clear that this is for illustrative purposes and no inference should be drawn as to the rate that will ultimately be agreed. Comments are sought on the possible use of a carve-out based on substance (which would be proportionate) or for specific sectors or industries. Such carve-outs may not be consistent with the policy aims of some countries.

The consultation document’s focus on complexities highlights the difficulty of including such rules on a global basis in a manner that is not distortive and that does not require disproportionate efforts in terms of compliance and administration. The denial of deduction of payments rules are particularly problematic from a practical perspective and the challenges highlighted in the paper around the tax base raise the question as to whether the focus should be on the income inclusion rule if any change is to be achievable.

There is a risk that distortions in the design of any potential new rules lead to increased levels of double taxation and disputes. For example, the consultation document is silent on how the elements of the proposal will interact and the order of application of the global inclusion rule and the denial of deduction of payments rule. This is perhaps inevitable given the potential outcomes for countries with different features of their economies and the political difficulties in achieving consensus on this point. For businesses, the key concern, expressed at the public consultation meeting in March 2019, will be to ensure that profits are taxed only once and that there is effective and timely resolution of disputes between countries.

There is as yet little data to evidence whether there remain significant BEPS concerns after thorough application of the post-BEPS transfer pricing rules, existing CFC rules and the changes made as a result of US tax reform, and therefore the global anti-base erosion proposal might be considered premature.

A further public consultation document is expected once a clearer outline of the undertaxed payment rule and the subject to tax rule has been developed.

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