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OECD Secretariat release Pillar II

Tax Alert

Publicerad: 2019-11-25

On 8 November the OECD Secretariat released its second public consultation document relating to a “Programme of Work for Addressing the Tax Challenges of the Digitalisation of the Economy.” This concerns “Pillar II” which would provide for global minimum taxation.

The consultation document, “Global Anti-Base Erosion Proposal (“GloBE”) Pillar-Two,” was again prepared by the Secretariat of the OECD as a non-consensus view. Comments are invited, to be delivered to OECD by 2 December, and will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020.


In May 2019 the Inclusive Framework agreed to The program of work is divided into two pillars.

Pillar Two (also referred to as the “global anti-base erosion” or “GloBE” proposal) calls for the development of a coordinated set of rules to address ongoing risks from structures that allow multinational entities (MNEs) to shift profits to jurisdictions where they are subject to no or very low taxation. The consultation document follows the four component parts of the GloBE proposal already disclosed:

  • An income inclusion rule to tax the income of a foreign branch or a controlled entity if it was subject to tax below a minimum effective rate
  • An undertaxed payments rule to deny a deduction (or impose source-based taxation) - including withholding tax- for payments to a related party that are subject to tax below a minimum effective rate
  • A switch-over rule in tax treaties to permit a residence jurisdiction to switch from exemption to a credit method if profits of a permanent establishment (PE) or derived from immovable property are subject to tax below a minimum effective rate
  • A subject to tax rule to complement the undertaxed payment rule by applying withholding or source-based taxes and adjusting treaty benefits on certain items of income when the payment is subject to tax below a minimum effective rate

These rules would be implemented by way of changes to domestic law and double tax treaties and would incorporate a coordination or ordering rule to avoid the risk of economic double taxation with more than one jurisdiction applying these rules to the same structure or arrangements.

While comments are welcome on all aspects of Pillar Two, the consultation document seeks comments specifically on three technical design aspects:

  • The use of financial accounts as a starting point for determining the tax base under the GloBE proposal as well as different mechanisms to address timing differences
  • The extent to which an MNE can combine high-tax and low-tax income from different sources taking into account the relevant taxes on such income in determining the effective (blended) tax rate on such income
  • Stakeholders’ experience with, and views on, carve-outs and thresholds that may be considered as part of the GloBE proposal. 

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

The consultation document seeks comments on 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. The document seeks views on the use of the accounting standard of the ultimate parent entity instead of the local generally accepted accounting principles (GAAP) of each entity, and on the acceptability of different standards. Consideration would also need to be given to cases in which consolidated financial statements are not prepared for any other purpose.

Recognizing that accounting profits may differ significantly from taxable profits, the document considers adjustments to accounting profits that could be required. The document seeks views on the types of material “permanent differences” between financial accounting income and taxable income that may need to be removed from the tax base. The document notes 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:

  • Carry-forward of excess taxes and tax attributes
  • The use of deferred tax accounting
  • 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. When the tax on the total foreign income is 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 regime to be aggregated.

Each approach has different policy implications and implementation challenges, and the consultation document seeks views on the interaction 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 (such as partnerships)
  • Crediting taxes arising in other jurisdictions (for example, tax arising under controlled foreign company rules)
  • The treatment of dividends and other distributions

Carve-outs and thresholds

Carve-outs to be considered include exceptions for regimes compliant with the 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 – for example, based on formulas.

Other related matters under consideration include using thresholds to restrict application of the rules based on the size of the group, de minimis thresholds, or specific industries. Views are sought on which options should be adopted or avoided.


As predicted, the impact on businesses from “Pillar I” is likely to be more administrative burden/cost as it is likely to generate only moderate additional taxes. The impact of “Pillar I” will be felt more heavily by countries, with Export-focused economies likely to lose a share of taxes to those in which sales are made. The impact of “Pillar II” will be to generate additional tax payments for those groups with low-tax elements to their structures. The overall level of additional taxes paid will be affected by the “minimum tax” rate chosen, but is also likely to be closely related to the level of blending adopted.

The document does not discuss the minimum tax rate that might be agreed to, or specifically how the income inclusion rule would be coordinated with the other rules under consideration.

Next steps

Comments on the consultation document are invited by December 2, 2019. A public consultation meeting will be held on December 9 at the OECD in Paris.

It is anticipated that a further public consultation document will be issued on 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.

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