Countries are hesitant to introduce a minimum tax

There must be a starting point for the OECD's global minimum tax rate, but according to sources, no nation should implement pillar two first.

Tax experts tell ITR that unless other countries adopt the pillar two global minimum tax rules first, no country has an incentive to implement them, which has resulted in an apparent never-ending series of political roadblocks in the US and Europe.

Director of global tax policy at Siemens in Munich, Georg Geberth, warns that "Moving first risks putting your country at a competitive disadvantage, if no other country follows."

Geberth continues: "The incentive to adopt pillar two only kicks in if there is a critical mass of countries doing the same, even the OECD said they really need a first mover to get implementation going."

Due to recent setbacks, some stakeholders are concerned about the OECD project's success. The abandoned US Build Back Better bill, which included pertinent reforms, and the stalled European Commission directive on minimum corporate taxation are two noteworthy issues.

The US and EU have the greatest influence on the outcome of pillar two's international negotiations, but both regions also deal with the most vehement political opposition to enforcing the regulations.

The proposal for a minimum tax on corporations was rejected on July 15 by US Senator Joe Manchin, who holds a crucial vote in a partisan Senate. Poland and Hungary, meanwhile, recently exercised their veto power over the European Council's minimum tax directive.

Nevertheless, on Wednesday, July 20, the UK government released a summary of the comments received in response to its pillar two consultation. This suggests that major jurisdictions are still making progress on implementation plans on a global scale.

There is uncertainty regarding how international clients should get ready for the rules because each country has the freedom to interpret them differently, according to Leonard Wagenaar, director of transaction tax at EY in London.

Despite the legislation's clear intent to adhere to the OECD's model rules, Wagenaar claims that parliamentary counsel effectively rewrote them in language more suited to UK laws.

"Yet lofty promises of giant piles of overseas cash are hitting the hard realities of policy implementation, and policymakers might be beginning to grasp stark truths about what they signed onto," he stated.

Multinational corporations are being criticized by legislators all over the world for using aggressive tax planning techniques and moving profits to low-tax jurisdictions. They are attempting to establish regulations that will compel businesses with digital operations to pay taxes in the nations where they generate revenue.

According to Geberth, "this is the rise of a destination-based corporate tax system for a so-called fairer world."

According to the OECD's pillar two strategy, nations are required to enact a 15 percent tax so that businesses pay the same rate on their worldwide profits wherever they are headquartered. The minimum rate, however, is dependent on a number of factors to function.

The income inclusion rule (IIR), the undertaxed payment rule (UTPR), and the qualified domestic minimum top up tax make up this framework for the global minimum tax (QDMTT).

According to Wei Cui, an expert in international taxes and professor at the University of British Columbia in Canada, at least a few nations will need to take the initiative to implement the framework's essential elements by the OECD deadline of December 31, 2023.

Cui asserts that there is little to no incentive for countries to adopt the UTPR without first implementing the IIR. The amount of taxes that a nation can impose under the UTPR will be constrained by international standards if the IRR is not already in place.

An additional source of uncertainty is the ongoing legal discussion over whether the UTPR from the GMT framework violates the OECD Model Convention's Articles 5, 7, and 9.

Contrary to popular belief, "there is no set revenue for adopting the UTPR," claims Cui.

Cui continues, "my argument is that although pillar two’s designers aimed to maximise strategic interactions among participating countries, there are remarkably few incentives for adoption."

Despite the "noise in the background," Tim McDonald, vice president of tax at Procter & Gamble in Ohio, asserts that pillar two is more likely to start than not.

"Even if I was charitable and accepted Cui's limit on the UTPR," said McDonald, "most of his argument falls away once a sufficiently large country adopts it, so the limit becomes practically meaningless."

The UK is one of the few nations that is unaffected by political roadblocks. The QDMTT is not yet included in the framework, despite the UK government having released the first portion of its draft rules for pillar 2.

According to local advisors, the second section of the draft, which will be made public in the upcoming weeks, will address the QDMTT. The IRR and its features are the main topics of the first part.

The UK government reaffirmed that there is a compelling case for introducing a QDMTT and UTPR, but the timing of their implementation will depend on how other nations fare in putting those regulations into place. IIR is scheduled to go into effect on December 31, 2023.

In case the OECD's pillar two is delayed, there are unilateral measures to target digital activities that are on hold in many countries while taxpayers wait for countries to move closer to minimum tax laws.

The Canadian government has already promised to resume its halted tax on digital services (DST). If the OECD two pillar solution is postponed, DST in Canada will go into effect on January 1st, 2024, according to Deputy Prime Minister Chrystia Freeland.

Additionally, it will be used retroactively for transactions starting on January 1, 2022.

According to country-by-country reports from Amazon and other major technology companies, tax burdens have increased in Australia, France, India, and many other nations with comparable DSTs.

In the event that the OECD reform package is not implemented, many European and Asia-Pacific countries have delayed but not withdrawn their DSTs. This was a means of accommodating the OECD's procedure, though.

Taxpayers anticipate that unilateral DSTs will be more expensive than a multilateral minimum tax system. The next piece of legislation to assist in establishing the OECD's pillar two framework, or else risk a fragmented international tax environment, could be the EU's minimum tax directive.

The US Congress was expected to provide updates to taxpayers, and Manchin's opposition to the minimum tax rules is changing international discussions and pressuring other nations to go first.

Manal Corwin, former official of the US Treasury who is now a principal at KPMG's Washington tax practice, claims that "we are sort of at the moment of truth and a significant economy needs to move forward."

"The stakeholder that is most likely to move this ahead now would be the EU" Corwin continues.

Hungary, however, is opposed to the EU's minimum tax directive because there is no assurance that pillar one and pillar two will be approved together as a package. As a result, the bloc would be at a competitive disadvantage.

According to the OECD's reports, pillar one introduces a sales-based income tax system, which is also postponed until at least 2024.

At the first meeting of the Economic and Financial Affairs Council (Ecofin) on July 12, Czech Minister of Finance Zbynk Stanjura made the EU Minimum Tax Directive a priority for this semester.

At the Ecofin meeting on October 4, the newly elected Czech presidency of the European Council might agree to the minimum tax directive.

The survival of the OECD's minimum tax rules under pillar two is becoming more and more dependent on the EU taking the initiative and setting an example for others to follow given the uncertainty in the US.

By fLEXI tEAM