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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.