Businesses also require more time to execute the OECD's pillar two, according to tax directors, and jurisdictions should seek further agreement with the US as countries like the UK want to approve the 15% minimum tax law by the end of 2023. Businesses also require more time to execute the OECD's pillar two.
"More time will be required. We have been working on the implementation process since January 2022. The administration is very complex," according to Christian Kaeser, global head of tax at technology company Siemens in Munich.
"We have some rules which we cannot apply. The data required means we have to analyse every single item – we would need to hire people. If there is an early adoption, there will be administrative obstacles ," he continues.
It happens at a time when the OECD and the UN, who developed the two-pillar model, are at odds about who will lead the discussion on global tax policy. Countries can now start new intergovernmental discussions on taxes thanks to the UN resolution that was reached on November 23.
The second pillar is to levy a minimum tax of 15% on multinational corporations with revenues of at least €750 million ($745 million).
It consists of a qualified domestic minimum top-up tax, an undertaxed profits rule, and an income inclusion rule.
With effect starting on December 31, 2023, the UK would adopt the worldwide minimum corporate tax rate, according to Chancellor Jeremy Hunt's Autumn Budget.
Denmark published a draft policy document on the OECD's pillar two first in the EU, intending to introduce it concurrently with the UK.
The approval of pillar two, however, may be in jeopardy due to the current economic climate and obstacles Hungary and Poland have erected.
"The world in 2022 is not the world of 2021. We have the energy crisis, inflation – is this the time you want to move on?" Kaeser says.
Businesses that are having a hard time controlling the rising cost of goods and services are worried about how quickly pillar two will be implemented. The implementation of the minimum 15% rate would likewise represent a substantial change for tax officials.
The adoption of pillar two, according to a tax manager in EMEA at a large global corporation, will be "extremely difficult" for tax experts to complete.
Another major problem is the lack of coordination with the US.
"How to align the legislation in the EU and UK with the US is not something policymakers in Europe have sought. It could also lead to a trade dispute ," the tax manager warns.
The adoption of the 15% tax rate would result in the imposition of a top-up tax on US companies in Europe, which has sparked a lot of political discussion. According to several tax directors, the US will not enforce the pillar two regulation.
"If the US is not implementing pillar two, everyone can implement the rules and apply a UTPR against US subsidiaries, but then the most powerful economy in the world will not apply the rules," according to Kaeser.
He claims it is quite unlikely that the US would agree to France taxing its organisations' revenues.
He continues, "The US is not buying it."
Jurisdictions will have the option of replacing the IIRs with the global intangible low-taxed income regulations, but doing so runs the danger of resulting in differing rates for countries that do and do not embrace pillar two, or they can choose to wait and hope the US accepts pillar two.
According to James Ross, a lawyer at the London law firm Taylor Wessing, European nations are likely to move through with UTPR regulations without the US's approval. The regulations and IIRs together might persuade other nations to implement the global tax deal.
Ross claims that "The US does not like to be dictated and the EU is struggling to get this through." “If you’re not going to be able to get it through the US, will it damage UK competitiveness?” he questions.
"You can question whether it will make much of a difference as far as the UK is concerned. The qualified minimum tax is not going to bite that often. If it [pillar two] doesn’t happen now, is it ever going to happen at all?" he continues.
Ross, who frequently counsels businesses on whether or not to establish operations in the UK, claims that the outcome of political debates will also have an impact on businesses who are planning expansions.
It is important to take into account that those who anticipate growth may fall within the OECD pillar two.
“This could bite. If you set yourself somewhere else, it won’t,” according to Ross.
Only a small number of countries would have advanced by next year anyway due to the short timeline imposed by the UK and other EU states and the ambiguity surrounding the idea.
According to the tax manager, tax treaties must be taken into account because the US agreement is still up for debate and there are numerous technical concerns regarding the minimum tax rate that need to be resolved.
"For example, the Dutch tax treaty is becoming a topic for US multinationals. The next step could be to involve tax treaties and give more time to align Europe with the US. It would help harmonisation rather than harm it."
In the meantime, pillar two is more in danger than ever, as demonstrated by the UN's most recent action. If the arrangement still stands in a year, it might look very different.
By fLEXI tEAM