• 1. Introduction

We refer to the OECD/G20 Inclusive Framework public consultation on Pillar One and Pillar Two Blueprints.

The OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) aims to find a solution to the tax challenges of the digitalisation of the economy. On 12 October 2020, the Inclusive Framework released a package consisting of reports on the Pillar One Blueprint and the Report on the Pillar Two Blueprint.

On review of the proposals set out in the Blueprints, the observations of the CCAB-I can be summarised as follows:

• Further public consultations are necessary on the next draft of the Pillar One and Pillar Two proposals.
• Plans to reach political consensus on the proposals by mid-2021 is over-ambitious and rushed. Stakeholders need time to analyse and respond to further iterations of the proposals.
• The technical workings of Pillar One and Pillar Two are highly complex and should be simplified before the measures are fit for purpose.
• Investment hubs will be severely disadvantaged under Pillar One and Pillar Two. This is an unacceptable outcome to fully compliant members of the OECD, and measures which damage the tax revenue of investment hubs must be reconsidered.
• The tax sovereignty of nations is compromised under the Pillar Two proposal.

Our views on Pillar One and Pillar Two proposals are set out below.

• 2. Agreement on far reaching international tax reform should not be rushed

The Inclusive Framework plans to continue discussions on the Pillar One and Pillar Two proposals with a view to reaching political agreement by mid-2021. While the reports on the Pillar One and Pillar Two Blueprints represent the convergent views of many key policy features, principles, and parameters, it is evident from the level of technical, administrative, and political issues in dispute, that consensus is still a long way off. Clearly a lot of work has been carried out by the OECD as secretariate and by the OECD/G20 Inclusive Framework participants, but the current Blueprints require further consideration, and the output of that work should be subject to another round of public consultation before it can be fairly claimed that world consensus has been achieved on new international taxation rules.

The corporate taxation rules we currently operate under have their genesis in laws established over one hundred years ago. Public consultation on further iterations of the Inclusive Framework’s output is essential before mandating the implementation of international tax reform. A pledge by the Inclusive Framework to continue to consult with stakeholders in public consultations is crucial to the credibility of this project.

The message of urgency to agree the Blueprint measures understandably stem from national public finance needs arising from the Covid-19 Pandemic. While the Pandemic presents a huge challenge for governments, the changes proposed in the Blueprints will have a long lasting and radical impact on how and where MNEs pay tax, and the consequences of rushed rules may persist long after the Pandemic crisis is resolved.

The United States of America (US) position in the negotiations to reach consensus remains uncertain. The US is a crucial stakeholder in the Inclusive Framework and US multinationals will be impacted by the reforms proposed under the Blueprints. The mid-2021 timeline for political agreement on Pillar One and Pillar Two proposal seems very tight for the US government to re-engage with negotiations. It is difficult to have confidence in a robust OECD/G20 led solution to the taxation of the digitalised economy if the US remains disengage with the negotiations.

• 3. The impact of BEPS 1, ATAD and GILTI is not reflected in the studies promoting Pillar One and Two

Extensive measures to tackle harmful tax practices have been adopted by countries around the world under the 2015 BEPS package. EU Member States are at an advanced stage of implementation of the Anti-Tax Avoidance Directive (ATAD) and ATAD2. The US Global Intangible Low-Taxed Income (GILTI) regime is also influencing change on harmful tax practices.

The OECD’s economic impact assessment1 study of Pillar One and Pillar Two uses data from over 200 jurisdictions and more than 27,000 multinational enterprise groups. However, the OECD study is based on 2016 data and does not capture the impact of the 2015 BEPS package, ATAD or the GILTI regime. Stakeholders should have complete information to make informed decisions. It is crucial that an assessment of the economic implications of the 2015 BEPS package, ATAD and GILTI are fully reflected in the discussions and decision-making process to Pillar One and Pillar Two proposals to gauge the true extent of the harmful tax practices targeted in the Pillar One and Pillar Two proposals.

The Inclusive Framework has not published individual country level economic impact assessments of Pillars One and Two. The OECD has carried out some analysis of Pillar One and Pillar Two impacts by industry segment for use by the Inclusive Framework, but this information is not available for public release either.

The economic impact assessment studies of Pillar One and Pillar Two do provide an impact break down on jurisdictional groups (high, middle, and low-income countries based on World Bank classifications) and on investment hubs which are identified as countries with foreign direct investment greater than 150 percent of GDP. Investment hubs with low rates of tax are estimated to face considerable tax revenue losses under Pillar One and Pillar Two. Ireland most likely fits the profile of an investment hub and consequently stands to be severely impacted by the changes proposed by Pillar One and Pillar Two.

Full transparency is essential and the full impact of Pillar One and Pillar Two at country level and at industry level should be debated in public.

The negative impact predicted for investment hubs must be properly considered, addressed, and resolved. It is not reasonable of the Inclusive Framework to promote international tax measures which undermine the tax revenues of countries like Ireland. Ireland’s corporate tax revenues are rooted in substance based corporate activity won due to Ireland’s policy of trade and investment openness coupled with a high functioning tax and legal system. The absence of published country specific data for economies like Ireland obstructs stakeholder efforts to make proposals which may benefit the Inclusive Framework’s tax reform solutions in the long term.

• 4. Simplification is essential

The calculations proposed under Pillar One and Pillar Two are highly complex and take as a starting point consolidated profit of the group which must then be deconstructed and then have various steps applied based on many new concepts to the professional tax and accounting community. It appears that high tax jurisdictions have less calculations to run under the proposals in comparison to the number of complex calculations which low tax jurisdictions would be obliged to produce.

It is of critical importance that tax rules do not discourage businesses to trade, grow and deliver services to customers and markets as a result of increased compliance costs, tax disputes and complexity all of which ultimately slow the growth of digitalisation globally.

Lack of clarity on the operation of measures and undue complexity places a burden on both businesses and tax administrations. Upon adoption, these factors lead to disputes and uncertainty of outcomes for businesses and taxing administrations alike. Complexity also poses risks of reduced growth for scaling businesses.

The design features and level of technical detail of Pillar One and Pillar Two as currently drafted are highly complex and require further work to mould the measures into workable international tax rules.

• 5. Commitment to reverse unilateral digital taxes

Several countries participating in the OECD/G20 Inclusive Framework have introduced unilateral digital tax measures. At this juncture in the development of the Inclusive Framework’s proposals, it must be established if such unilateral measures will be reversed when consensus on tax reform is agreed. Without commitments on the reversal of digital tax measures, double taxation is a real possibility and the work on consensus led tax reform may have an unsuccessful conclusion.

Countries taking part in the Inclusive Framework should pledge to remove unilateral digital tax measures and agree not to implement new unilateral measures in the interim. There should be a binding commitment by all Inclusive Framework participants not to introduce unilateral measures that focus on carve-outs agreed under the new rules. Such commitments are necessary to demonstrate that Inclusive Framework led tax reform will bring about genuine multilateral reform.

• 6. Tax Sovereignty

The GloBE proposals under Pillar 2 erode the sovereign right of countries to choose the corporate tax rate that is best for their economic circumstances and their tax system. Under long-standing principles, there should be no question that the country where the commercial activities are performed is fully sovereign in deciding whether and how to tax these activities. Measures which seek to disallow payments simply because of the tax rate of the recipient seem to be in breach of EU principles where the recipient is resident in an EU Member State. EU Member States have the sovereign right to set their own tax rate.

• 7. Observations on Pillar One

Pillar One would establish new rules on where tax should be paid (“nexus” rules) and a fundamentally new way of sharing taxing rights between countries. The aim is to ensure that digitally intensive or consumer facing MNEs pay taxes where they conduct sustained and significant business, even when they do not have a physical presence.

Pillar One seeks to introduce a new international framework under which more of the profits of global multi-nationals (MNCs) would be allocated to market jurisdictions, using a formulaic approach.

The Pillar One Blueprint contains the design features of the new taxing right under Amount A and Amount B:

Amount A

Revenue threshold

The Revenue threshold should be set at a minimum threshold of €750 million in line with the Country By Country Reporting (CBCR) annual gross revenue threshold. A high threshold will minimize compliance costs and help keep administration costs proportionate and manageable.

Scoping rules

The current proposal applies to profits from significant and sustained interactions with customers in a market jurisdiction, focusing on automated digital services (ADS) and consumer-facing (CF) businesses.

Many of the scoping concerns from the 2019 consultation continue to feature in the Blueprints for Pillar One and more certainty is essential at this juncture. The definitions for ADS and CF businesses are broad and vague. A clear economic basis should underline the scope of ADS and CF businesses.

While the scope carve-out for regulated entities is positive, the exclusion should also extend to groups which are predominantly regulated, where for example, a group has a mix of regulated and unregulated entities.

Nexus rule

A new nexus rule is proposed to identify Amount A market jurisdictions to receive potential profit reallocations, along with sourcing rules and a profit reallocation key. When looking at revenue sourcing rules, consideration must be given to non-revenue generating users (e.g., users driving traffic to ADSs/CFBs) and an adjustment should be allowed for such users to reflect a fair revenue allocation to a particular market.

Simplified administration process

To tackle complexity, further work is necessary to better align Pillar One information with financial reporting information available to MNEs. For example, companies may not have information for segmentation purposes so consideration should be given to matching the already vast information resources of MNEs to the data required to derive Amount A.

Amount B

Amount B is not subject to a turnover threshold nor is it restricted by industry as proposed for Amount A. For Amount B, the Blueprint suggests a standard remuneration based on arm’s length principles for activities involving distributors that buy from related parties and sell to unrelated parties and have a routine distributor functionality profile. Given the broad application of Amount B, it is important that the functional characterisation of the standard remuneration is not over-simplified, and that Amount B reflects regional benchmarking studies.

Disputes resolution

The chapter in the Blueprints dealing with tax certainty focuses on the prevention and resolution of disputes on Amount A. However, the details on dispute resolution for Amount B is less developed with a suggestion that mandatory binding dispute resolution would apply to an Amount B dispute once existing procedures were exhausted. Administrability, dispute resolution and simplicity are among the most important considerations when working out the design features and technical detail of how these complex cross border tax measures will operate in practice. The dispute resolution mechanisms for both Amount A and Amount B must be fully formed and available to taxpayers as soon Pillar One is implemented and tax authorities must be sufficiently resourced to support dispute resolution.

• 8. Observations on Pillar Two

Pillar Two would introduce a global minimum tax to address the OECD/G20’s remaining concerns on issues linked to BEPS by MNEs.

The blueprint on Pillar Two sets out the global anti-base erosion proposal (GloBE proposal) which seeks to ensure that large and internationally operating businesses pay at least a minimum level of tax. It includes the design of four rules set out in the Programme of Work: a) the income inclusion rule (IRR); b) the switch-over rule; c) the undertaxed payment rule (UTPR); and d) the subject to tax rule (STTR).

ETR should support the use of tax incentives

Investment in innovation should not negatively impact the Effective Tax Rate (ETR) of an entity or group. OECD policy has traditionally recognised the positive corporate behavioural impact of tax incentives such as R&D tax credits, patent boxes and tax relief for the acquisition of intellectual property. R&D tax credits, patent boxes and tax relief on the capital cost of intellectual property must be adequately remunerated and reflected when deriving the effective tax rate of entities and groups. If GloBE diminishes the tax value of these incentives, businesses may decide to reduce investment in these strategic areas.

ETR should be derived at an aggregate level

Global blending similar to the US GILTI provisions, is preferable to jurisdictional blending. The method of establishing a group’s ETR must reflect the global nature of the businesses at the centre of the Inclusive Framework’s proposals, which are invariably taxed in more than one jurisdiction. Tax paid on the income of a foreign subsidiary should be considered when computing the ETR on an aggregate group level.

Double tax relief

An effective multilateral instrument must be developed and ready for agreement before the tax measures proposed under Pillar Two are legitimised. If governments introduce local versions of the Pillar Two rules to raise revenues without mechanisms to address double tax, such as revised tax treaties, businesses could incur multiple layers of tax on the same income.

Any new measures should not give rise to double taxation. It is important that the measures should also not present a barrier to the growth of international trade, because uncertainty and double taxation of profits both hinder investment and create barriers to economic growth.

Interaction of Pillar Two with the arm’s length principle

The objective of Pillar Two is to address harmful tax practices of base erosion and profit shifting. With that stated objective in mind, Pillar Two should not apply to income from arrangements entered into by parties dealing with each other on an arm’s-length basis. Controlled Foreign Company rules factor the arm’s length principle into its design and a similar approach should be considered under Pillar Two.