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As agreement on the OECD's pillar-two solution stalls, multinationals may still experience problems with transfer pricing.
According to tax directors, the OECD's two-pillar solution is still a long way off given the ongoing complexity and hardening of the global tax debate.
Following months of negotiations, Hungary's state secretary Zoltán Kovács reiterated the nation's opposition to the global minimum tax in late June. The nation has demanded the union of the two pillars, arguing that the only effective connection is one that is legally binding.
However, some nations, like France, have remained committed to supporting the tax structure.
A tax director at a big four firm asserts that "given everything, it [pillar one] is not going to happen in the US in the next few years. "
Clément Beaune, France's secretary of state for European affairs, has stated that the country is prepared to oppose the global tax if it is adopted by unanimous vote.
The tax director asserts that another indication of the hardening of the international debate on taxes is the fact that the EU is considering superseding treaties in the context of pillar one.
According to Christian Kaeser, global head of tax at the Munich-based Siemens automation company, the EU has demonstrated a sizable appetite to enact a minimum tax on multinational corporations.
He claims that the US is no longer a point of contention for the EU Commission. "Now, it’s the EU alone – it stresses the argument that it’s important to have consistency of the rules."
Kaeser is sure that member nations' opposition to the global tax, like Hungary's, will not prevent the EU from approving the framework.
"Hungary, I don’t think they will move. They are saying it’s not the right time. And why wouldn’t you wait for the dust to settle? It looks like as a directive it could be significantly delayed. But if the directive is not moving forward, then France and Germany would still go with it," he claims.
German-based businesses like Siemens are still looking forward to the implementation of pillar two.
Kaeser asserts that the likelihood is 90% or even higher.
Whether or not the directive is enacted will determine Germany's next course of action. According to Kaeser, if the EU is unable to come to an agreement, the nation may be forced to enact its own regulations.
Pillar one's implementation appears to be even further off in the future.
"Pillar one, forget that. There is nothing this year and probably nothing next. It’s really vague," says Kaeser.
The goal of Pillar One is to redistribute profits from multinational enterprises (MNEs) with total revenues greater than €20 billion ($23.6 billion), but because of its complexity, it has not always been taken seriously or implemented.
For MNEs with revenues greater than €750 million, pillar two aims to apply a global minimum corporate tax rate of 15%.
Tax uncertainty, which was brought on by incomplete information on pillar one, has been the main compliance problem.
The lack of technical information regarding pillar one in the Inclusive Framework worries Philippe Penelle, managing director at the Los Angeles branch of consulting firm Kroll.
"It will be difficult for companies to comply and there is no way of gaining tax certainty. Multinationals will end up with a bit more tax and I’m not sure whether taxpayers would have the tax certainty that was promised," he adds.
Above all, the complexity of pillar one and the scope of pillar two may result in a heavier compliance burden for corporations.
The OECD's tax proposals, according to Nupur Jalan, international tax lead at Düsseldorf-based travel site Trivago, are certain to make it difficult for businesses to comply with documentation regulations.
"I did a session in Luxembourg around pillar two and it’s more about accounting. You will need to know how US tax works if you are required to do the filing. It brings a lot of challenges for companies," she says.
pJalan continues, "pillar one is equally complicated, it’s just that it’s not as applicable."
Above all, the COVID-19 pandemic, the recession, and the economic challenges that followed as well as Russia's invasion of Ukraine have made MNEs' pain points worse, which could jeopardize the OECD's plan once more.
As a result, some nations have advanced the dates for the implementation of each pillar.
The UK announced last month that the pillar two legislation would not go into effect until accounting periods beginning on or after December 31, 2023. The push, according to the government, would give businesses more leeway to adjust and prepare.
The methodology used to allocate profits under pillar one and the remaining complexities within pillar two could result in significant tax uncertainty for corporations.
The ambitious goal of pillar one will need the support of many nations, and those who will suffer the most from the loss of tax revenue brought on by profit shifting are left with confusing tax laws.
Because of worries about the thresholds and profit allocation rules, countries in Latin America in particular are still waiting for revised proposals on pillar one and pillar two.
Although many nations, including Brazil, have matched their tax policies to global norms, their intricate tax policies are hurting their ability to collect taxes. Lack of information in pillar one will only make the problem worse.
Jurisdictions will be forced to revise and agree on a two-pillar solution that enhances tax equality as the international discussion on taxes continues. The lack of certainty will keep businesses struggling to comply and will make it more difficult for nations to streamline their TP regimes.
By fLEXI tEAM