What is the OECD G20 Inclusive Framework on Base Erosion and Profit Shifting?
The OECD G20 Inclusive Framework on Base Erosion and Profit Shifting is a global initiative aimed at tackling international tax avoidance and adapting tax rules for the digital age.
In recent years, the issue of a more level playing field as regards the amount of tax paid by multinational entities (MNEs) has come into focus for a number of reasons.
In October of 2021, a landmark agreement was reached on setting a minimum global rate of taxation for MNEs generating a certain amount of income and at the same time implementing a ‘two-pillar’ approach.
MNEs that fall within the scope of Pillar 1 of the agreement (see below) have to pay tax in any jurisdiction where they operate and generate profits, regardless of whether or not they have a physical presence in that particular jurisdiction.
The official title of the agreement is the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Two-Pillar Solution or 2021 October Statement).
Why was the agreement so important?
The agreement reached in October of 2021 was very important because 136 countries around the world signed up to work with the OECD G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and specifically on the Two-Pillar solution.
Why does the international tax system need to be reformed?
Many countries raised concerns about MNEs failing to pay their fair share of tax in countries where they operate and generate profits, not only where their physical location may be.
The aim is also to increase transparency and regain lost income for several countries as a result of tax avoidance by MNEs.
What is Base Erosion and Profit Shifting?
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used by MNEs that exploit gaps and mismatches in tax rules to avoid paying tax.
As referred to above, this costs billions of dollars in lost revenue every year and especially affects developing countries that have a higher reliance on corporate income tax.
What is the OECD G20 Inclusive Framework on BEPS?
The OECD G20 Inclusive Framework on BEPS (The Inclusive Framework) is made up of 142 member countries and was set up to reform the international tax system with the aim of adapting it to the 21st century, including tax challenges arising from the digital economy.
How did the formation of the OECD G20Inclusive Framework come about?
The OECD and G20 adopted the Base Erosion and Profit Shifting (BEPS) Action Plan in 2013. That Action Plan identified 15 actions.
After two years of work, the 15 actions were converted into a consolidated set of measures which was presented to the G20 leaders in November of 2015.
The landmark agreement of October 2021 was largely the result of steady work and progress on the first of the 15 measures, entitled “Addressing the Tax Challenges Arising from the Digital Economy.”
Following the presentation of this consolidated list of measures to tackle BEPS, the OECD and G20 needed to look for a way to make the implementation of those measures more inclusive.
The idea was that the countries that were interested and committed to working on implementing the measures were put on an equal footing in the negotiations. This led to the creation of the OECD G20 Inclusive Framework.
The main role of the Inclusive Framework is to monitor and review (using peer reviews among other methods) the implementation of anti-BEPS measures.
It is important to note that there are other international organizations and regional tax bodies involved in this work, along with the members of the Inclusive Framework.
Has the agreement reached in 2021 been implemented yet?
Since the agreement in October of 2021, a lot of progress has been made in the implementation of the agreement, which, as referred to above, has two ‘pillars’ or sections.
Pillar 1
The first pillar refers to the technical rules required for the implementation of the reallocation of taxing rights, meaning how to ensure that multinational entities pay tax on income generated in a country where they may not necessarily have a physical presence.
Multinational entities (MNEs) with global revenues above EUR 20 billion and profitability above 10% will be covered under this pillar. 25% of the profit made above the 10% threshold will be reallocated to market countries where MNEs have business activities, regardless of whether they have a physical presence there.
In July of 2022, a Progress Report on Pillar 1 was issued for public consultation.
The aim is that as many countries as possible ratify a Multilateral Convention (MLC), also known as the Multilateral Instrument (MLI), to effectively bring the provisions under Pillar 1 into force. Over 100 countries have so far agreed to participate, and 79 have now ratified the MLC.
Pillar 2
The second pillar is the basis for the implementation of a 15% global minimum tax rate for Multinational Entities (MNEs) with consolidated revenues of at least EUR 750 million, using the Global Anti-Base Erosion (GloBE) Model Rules.
These rules were released in December 2021, followed by the related ‘Commentary’ in March 2022, titled ‘Tax Challenges Arising from the Digitalization of the Economy – Commentary to the Global Anti-Base Erosion Model Rules (Pillar 2) First Edition’, containing guidance on several matters including:
- Calculation of an MNE’s Global Income or Loss, including rules on whether any top-up tax can be charged in any given jurisdiction, particularly low-tax jurisdictions.
- Reorganization and Special Ownership Structures, addressing issues such as how a transfer of a controlling interest or the transfer of assets and liabilities could affect the calculation of an MNE’s consolidated revenue.
- Tax Neutrality, ensuring that the GloBE Model rules are applied correctly to prevent MNEs from paying tax above the minimum rate.
- Administration and Transitional Rules, detailing the practical measures that need to be taken to implement the GloBE Model rules and the information MNEs must file to demonstrate compliance.
- Currency Conversion, addressing potential issues if countries set their thresholds in a currency other than Euros.
- Transitional Rules.
Following public consultation in April of 2022, work began on the GloBE Model Rules Implementation Framework to provide further guidance on the implementation of Pillar 2 of the 2021 agreement.
One of the main goals is that as many countries as possible implement the new rules on the global minimum tax rate for MNEs simultaneously, so that measures can be incorporated into each country’s domestic legislation in a coordinated way.
In December of 2022, the Implementation Package for Pillar Two was released.
In February of 2023, a document titled ‘Agreed Administrative Guidance for the Pillar 2 GloBE Rules’ was issued.
It also includes information on the scope of the GloBE Model Rules and further guidance on transitional elements, such as the Subject to Tax Rule.
The Agreed Administrative Guidance will be incorporated into a revised version of the ‘Commentary’ (see above), which is expected to be released later this year.
Following the issue of this document, the Inclusive Framework has stated that it will continue to monitor progress on implementation and will release updates to the Agreed Administrative Guidance on a regular basis.
There are many advantages to implementing measures to fight BEPS and avoid the potential loss of revenue it generates.
OMC will keep you informed of further developments regarding the October 2021 agreement and its implementation.
Should you be interested in further reading or information on this subject, please do not hesitate to contact us.
