IBFD- Tax Analysts Seminar
Implications of the OECD Global anti-base
erosion proposal (Pillar II)
Belema Obuoforibo
Ameya Kunte
David Stewart
Ridha Hamzaoui
Walter Andreoni
Mumbai, 4 December 2019
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Context and background of the proposal
Essence of the proposal
Technical design of the proposal
Implementation issues including potential double
taxation
Tax policy issues
Questions and answers
Agenda
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Context and background of the proposal
8 November 2019: Consultation document
Comments up to 2 December 2019
Public consultation meeting to take place in
Paris in December 2019
Aims to address remaining BEPS issues
Prevention of profit shifting, harmful tax
competition, distorting tax incentives and
uncoordinated/unilateral measures
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Essence of the proposal
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Essence of the proposal
The four component parts of the Pillar II proposal are:
a) an income inclusion rule;
b) an undertaxed payments rule;
c) a switch-over rule; and
d) a subject to tax rule
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Parent
company
a- an income inclusion rule
Subsidiary
CountryA
Country B
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PE
that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate
Effective tax ratebelow minimum tax rate
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Parent
company
b- an undertaxed payments rule
Subsidiary
CountryA
Country B
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that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;
Effective tax ratebelow minimum tax rate
PAYM
ENTS
- No deduction- WHT
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Parent
company
c- a switch-over rule
CountryA
Country B
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PE
to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum rate; and
Effective tax ratebelow minimum tax rate
Exemption to credit
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Parent
company
d- a subject to tax rule
Subsidiary
CountryA
Country B
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a subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.
Effective tax ratebelow minimum tax rate
PAYM
ENTS
- WHT- Treaty benefits under A-B treaty
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Pillar Two
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Technical design of the proposal
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§ 13: tax base would be determined by reference
to the CFC rules or (in absence) the domestic CIT
rules of the Sh/s
All-in approach all subsidiaries’ taxable
income should contribute to the identification of
a minimum ETR
Challenges:
Differences among jurisdictions in calculating
the tax base
Timing differences
Different accounting rules
Tax Base determination – Chapter II
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Purposes: rely on unadjusted accounting figures may
“over” or “under” estimate net profits need of
adjustments
MAIN REASONS: Permanent and Temporary differences
Permanent differences: i.e. non deductible costs or non
taxable income (exemptions)
Temporary differences: difference in time for taking into
account income or expenses for tax purposes (i.e.
anticipated costs deduction or deferred taxable income
– anticipated taxable income or deferred costs
deduction)
Adjustments
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Program work identified “financial accounting”
as a starting point to simplify the identification of
the relevant taxable base to be used for the
calculation of the ETR
Financial accounting have to be adjusted
agreement to be found
Simpler way: rely financial accounting standards
used for other purposes
Parent accounting standards vs. Subsidiaries
accounting standards
Adjustments
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ETR needs as well to decide whether a blending
is necessary
Worldwide blending: aggregation of all foreign
income and foreign taxes
Jurisdictional blending: apportionment of
foreign income between different jurisdictions
Entity blending: determination of income and
taxes of each entity
Blending
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Determination of taxable base for GloBE purposes is
evidently difficult
Choice among different technicalities is a matter of
policy and reach of common consensus
Compliance for MNEs will evidently increase despite
the choice of the method
How the GloBE will interact with domestic CFC
regulations already in place?
Some remarks
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Implementation issues and potential
double taxation
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Example 1 - Income Inclusion Rule
ParentIncome Rate Tax
100 22% 22
Sub AIncome Rate Tax
60 10% 6
Sub BIncome Rate Tax
40 30% 12
TotalIncome Tax Rate
100 18 18%
GloBEIncome Rate Tax
60 5% 3
GloBEIncome Rate Tax
NIL NIL NIL
GloBEIncome Rate Tax
NIL NIL NIL
Jurisdictional / Entity Level Blending
Jurisdictional / Entity Level Blending
Worldwide Blending
GloBE Rate - 15%
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Example 2 - Income Inclusion Rule
ParentIncome Rate Tax
100 22% 22
Sub AIncome Rate Tax
60 10% 6
Sub BIncome Rate Tax
80 30% 24
Sub BXIncome Rate Tax
100 5% 5
GloBEIncome Rate Tax
60 5% 3
GloBEIncome Rate Tax
NIL NIL NIL
GloBEIncome Rate Tax
100 10% 5
Entity Level Blending Entity Level Blending
GloBE Rate - 15%
Entity Level Blending
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Example 2 - Income Inclusion Rule
ParentIncome Rate Tax
100 22% 22
Sub AIncome Rate Tax
60 10% 6
Sub BIncome Rate Tax
80 30% 24
Sub BXIncome Rate Tax
100 5% 5
GloBEIncome Rate
GlobeTax
60 5% 3
GloBEIncome Rate Tax
GloBETax
180 16% 29 NIL
Jurisdictional Level Blending
Jurisdictional Level Blending
GloBE Rate - 15%
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Example 2 - Income Inclusion Rule
ParentIncome Rate Tax
100 22% 22
Sub AIncome Rate Tax
60 10% 6
Sub BIncome Rate Tax
80 30% 24
Sub BXIncome Rate Tax
100 5% 5
GloBETotalIncome
Rate TotalTax
GloBETax
240 14.6% 35 1
Worldwide Blending
GloBE Rate - 15%
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Example 2 - Income Inclusion Rule
Blending Approach GloBE Tax
Entity Level Blending 8
Jurisdictional Level Blending 3
Worldwide Blending 1
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Blending Approach choices – arbitrage
Double taxation – application of income
inclusion rule and tax on base eroding payments
Other areas – CFC + GloBE, Linking Rules and
Ordering Rules, GAAP adoption
India inbound impact – largely sourced based
payments subject to Indian tax
India impact - Impact on new manufacturing
companies, IFSC, SEZ entities (depending
upon the floor rate)
India outbound impact
Some Thoughts
Tax policy issues
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Tax Policy Issues
• Will this be the end of tax competition?• Effects of Blending Method• Alternative Incentives
• Higher Tax Burdens
• Higher Compliance Burdens
• Alternatives• Revisit BEPS Action 3 – CFCs• Withholding Tax on Fees for Technical Services (UN Model Article
12A)• CCCTB (EU) or Single Sales Factor Apportionment (US States)• GILTI and BEAT (US)
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GILTI and BEAT
• Global Intangible Low-Tax Income• Applied to active income of CFCs• Reduced by 10 percent of tangible property• 50 percent inclusion with an 80 percent FTC• Results in an minimum Rate ~13 percent
• Base Erosion and Antabuse Tax• Targets outbound payments to related parties• Reduced rate of 10 percent is applied as an alternative
minimum tax• Calculation required if ratio exceeded and average receipts
exceed $500 million• Related party payments are added back into base
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