Two fundamental components, known as Amount A and B, are uncertain, which raises the possibility that the endorsement of pillar one may be in jeopardy.
Tax directors worry that until more information about Amount A and Amount B is clarified, the anticipated adoption of Pillar 1 in 2024 will remain unrealistic.
Ednaldo Silva, founder director and TP expert at online database company RoyaltyStat in Washington, DC, says, "pillar one is complex, pillar two is much simpler. Both multinationals and tax administrations want certainty and pillar two brings that to the table."
"The big question is, you still need TP rules for the appropriate allocation of taxable income to jurisdiction," he continues.
If policymakers are unable to make both objectives work together, Silva claims that TP rules based on comparables will always face difficulties and that the two-pillar solution's central concept will appear to be "a collage of policies."
As pillar one lacks specifics, tax directors believe pillar two has a better chance of passing and being put into effect.
Despite ongoing political debates, the head of tax at a Swiss manufacturing company tells ITR that businesses continue to predict the likely impact of the two-pillar solution on their operations. The pillar two proposal is the subject of most internal discussions within multinationals, however, due to the scope and complexity of pillar one.
Compared to pillar two, pillar one targets multinational enterprises (MNEs) with total revenues of more than €20 billion ($23.6 billion). As a result, fewer businesses will be impacted by the rule.
Multinationals with revenues over €750 million will be subject to a 15% global minimum tax under pillar two.
The head of tax claims that "Pillar two is where most companies are working on. Pillar one is further away – the US has a big say and a lot of clarity is needed. Pillar one needs to be postponed; the date is not feasible."
According to Raphael Coin, founder of the Paris-based law firm Affidavit-avocat, the scope of pillar one indicates that it is intended for "extremely sophisticated companies."
The ability of the targets to adapt, he adds, is just as important as the complexity of the law.
The Inclusive Framework (IF), according to Philippe Penelle, managing director at the Los Angeles branch of consulting firm Kroll, has not advanced much lately in terms of pillar one's Amount A and B elements either.
Corporations covered by the scope of Amount A would be able to distribute profits to regions according to where they were first made.
Certain governments that are unable to collect taxes because of the current nexus regulations, which base revenue on physical presence, would greatly benefit from this.
Amount B aims to standardize the compensation of related party suppliers engaged in "baseline marketing and distribution activities" and is intended to simplify the TP rules for tax administrations.
Penelle claims that Amount B's coordination with TP rules is dubious and that it has technical problems.
"A lot of companies are confused about Amount B and their TP position. There is a big difference between Amount A and B. Amount B is where you transfer taxable base, which means the day Amount B is implemented you will have a transfer of value between the manufacturer and distributor."
"From a TP perspective, you have to recognise that exchange of value of business restructure. The way Amount B is designed right now, I do not see any exclusion from having to price that transfer of value," he says.
Tax directors are scrutinizing Amounts A and B, but policymakers have demonstrated a renewed commitment to addressing some of the concerns voiced by stakeholders.
On July 11, consultation materials on Amount A were made available for written feedback on the overall structure of the rules. The document reaffirmed that due to additional work required, the Amount A rules would not be implemented until 2023, or one year after pillar one is scheduled to do so.
According to Anju Singh, national leader of operational TP at Silicon Valley-based consulting firm RSM, the document contained a substantial amount of information on the layout of pillar one.
“Affected companies should review the document carefully and may want to consider taking the opportunity to engage with the OECD and country policymakers through the consultation process,” she says.
The conclusion of public comments is anticipated by August 19.
At the October IF meeting, the OECD is anticipated to review the feedback it has received and work to stabilize the rules, according to Singh. "When the Amount A rules are stabilised, they will be translated into provisions for inclusion in a multilateral convention, to be signed and ratified by IF members."
Companies must continue to examine and evaluate the two-pillar solution's potential effects in the interim.
MNEs will probably pay more in taxes, especially those that are based in nations that have expressed a strong desire to adopt the new legislation.
The head of tax claims that there is currently a great deal of uncertainty. and discussions about how to handle that are currently taking place.
Internal discussions will be essential to getting ready for the OECD's new regulations as corporations continue to concentrate on pillar two and pillar one's implementation may be postponed.
Companies operating in nations like the UAE and Bahrain are conducting modeling exercises to understand the impact of the tax framework, according to Thomas Vanhee, founding partner at consultancy firm Aurifer in Dubai.
The OECD deadline will also need to be closely monitored by taxpayers, especially as it is pushed back to a "more realistic" deadline, according to Vanhee.
“Now there is more flexibility with the timeline, which makes things more dangerous,” he says.
Overall, the OECD's 2024 deadline may be challenging to meet, especially as businesses try to reduce the risk of inflation and the uncertainty brought on by the Ukrainian conflict.
While nations like Hungary and the US continue to oppose the deal, Europe's next move may spark some political discussion as businesses worry about being at a competitive disadvantage. Perhaps waiting for the dust to settle is the best course of action.
By fLEXI tEAM