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The OECD and BIAC disagree about the pillar two model rules.

Because according to its experts, laws on credits and hybrid accounting will result in major technical issues, the OECD's business advisory group is opposed to pillar two.

Will Morris, vice chair of the OECD's Business and Industry Advisory Committee, has advocated for more revisions to the pillar two model rules, while the organization's leading defenders of the rules contend otherwise in an article published on August 19.

Tax experts describe the OECD's response as being less than favorable for the stability of the global tax accord comprising close to 140 countries. So yet, fewer than 20 nations have published legislative drafts.

Regarding the article from the OECD's tax leaders, one head of worldwide tax of a retail company with headquarters in London said, "It is a slightly stingy opinion."

Regardless of the content, he continues, "the fact they feel the need to respond in this way is not a good sign."

Some countries have delayed their implementation dates at least until January 2024, even though the G20/OECD deadline for implementation is at the end of December 2023.

However, some tax experts believe that BIAC's demands to revise elements of the structure for pillar two came too late.

Tax officials, particularly the Danish tax office Skattestyrelsen, are actively monitoring the conversation. Senior revenue officer at Skattestyrelsen in Copenhagen: "Will Morris raises valid points but should know very well that what he is asking for is a non-starter."

The Bloomberg piece was written by OECD officials Pascal Saint-Amans, Achim Pross, and John Peterson who disagree with the BIAC's justifications for changing pillar two given that nations have already begun writing legislation.

The justification offered by BIAC is based on legislative hold-ups, tax credit outcomes that show good winners and losers across nations, and constrained room for corporate input.

"You may think we are perhaps belittling Morris’ article (guilty as charged, but he is a friend who will surely take it in his stride), we are not seeking to belittle the issue itself," they said.

They said, "this is a very complicated and challenging issue, and we in the secretariat acknowledge and appreciate the constructive discussions on the issue with the international business community."

In a separate interview, Saint-Amans states, "this is by no means to suggest that it was a perfect business consultation process, but simply to note that open and constructive discussions did take place and are continuing."

Morris claims that revisiting model rule modifications and starting to address the technical difficulties there is the most straightforward method to address the issues with pillar two. The article by the BIAC vice chair from July 28 came after the EU put off implementing the model guidelines because Hungary rejected the proposed directive.

Morris says that one of the biggest design flaws was the introduction of the model rules with virtually no business consultation and no subsequent opportunity for input.

More corporate input would have been beneficial, according to interviews with Ann-Maree Wolff, Rio Tinto's head of tax, and other worldwide tax directors.

To help close the remaining gaps, Wolff said "it would have been beneficial for the OECD to include large business perspectives in the later stages of the project too."

Morris claims that corporations from other countries might have offered the essential guidance on how to implement the deferred accounting structure.

"If pillar two is fully brought in for even just 40 countries in January 2024, an administrative and compliance disaster for both taxpayers and tax administrations could occur," added Morris.

He cites Model Rule Article 4.4.1, which would cap the benefit of a deferred tax attribute at 15%, regardless of whether the jurisdiction's statutory corporate tax rate is greater.

According to the rules, this will lead to unjustifiable top-up taxes rather than the rate smoothing that was promised, continued Morris.

Article 4.1.5 presents another difficulty because it may result in tax obligations in a year with no revenue. This occurs when a global anti-base erosion (GloBE) tax attribute that could be beneficial in future years is increased due to a permanent accounting difference.

The laws levy tax in that year of no income, claims Morris, "rather than allowing taxpayers to adjust the loss to remove the benefits of the permanent difference."

It appears that the pillar two accounting standards will become a source of increasing complexity, which may result in double taxes and more disagreements. Morris emphasizes that even at this late stage in the process, the OECD must still agree to modify the model regulations in order for company tax experts to address those difficulties.

Another problem for BIAC members is that under pillar two, qualified refundable tax credits for activities like R&D are treated more favorably than non-refundable tax credits for the same activities.

In one scenario, pillar two income is increased by the amount of the refundable credit in order to somewhat lower the effective tax rate; while, in the other scenario, the non-refundable credit further lowers the effective tax rate.

If they are subject to the UTPR in pillar two simply because they have benefited from tax credits for years, taxpayers are in a difficult situation. In accordance with the UTPR, perks and deductions for income that is not taxed at the 15% minimum rate would be denied.

Morris says that "good negotiating by countries with pre-existing refundable tax credits" is likely to blame for this result. The OECD's justifications, in contrast, include taking into account the tax base and recognizing refundable tax benefits as an expense.

Including the benefit of the non-refundable credit in pillar two income, as is the case with refundable credits, is one fix he offers. But senior OECD tax policymakers do not share this viewpoint.

The same procedure was suggested in the guidelines' initial drafts, according to Pascal Saint-Amans, director of the OECD's Paris-based Centre for Tax Policy and Administration.

Morris's perception that there was little opportunity for participation is a little puzzling, adds Saint-Amans, given that the consultation's draft was published more than a year before the model regulations.

The tax leaders of the OECD explain in the Bloomberg article how pillar two determines a jurisdiction's effective tax rates using financial accounting as a base.

The distinction between refundable and non-refundable tax credits on economic substance is important for this reason. Non-refundable credits are considered a reduction in taxes, whereas refundable credits are recognized as income.

Many businesses prefer a gradual approach to smooth the transition to pillar two, especially the penalty regime, even if the OECD is working on safe harbors. According to some tax directors, this includes years of lax regulation.

Guidance for the architecture of information exchange under the framework, as well as for safe harbors, dispute resolution procedures, and rule coordination, is being compiled by the OECD Working Party on Pillar 2. Even though these upcoming guidelines are non-binding, they may add to the already complex regime's complexity for enterprises.

According to the OECD tax leaders' article, "We do not think that our guidance is ineffective, given the role it has within the context of the model rules as well as the EU draft directive."

The complexity of the global minimum tax regime will simply have to be determined by the countries' adoption of the model rules in their draft laws. Given the numerous political and technical negotiations necessary to progress any suggested adjustments, it appears that it is too late for the OECD to open the model regulations to changes.

Members of the BIAC could still offer suggestions at the federal level to close gaps in the deferred tax accounting's handling of credits and incentives.



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