US GILTI, book minimum tax and Pillar Two – how will they interact?

Thursday 30 March 2023

Session Chairs

Margriet Lukkien, Loyens & Loeff, Amsterdam

Kimberly Majure, KPMG, Washington DC

Panellists

Mary Anne Buechel, Paramount, London

Laurence Clot, Dentons, Paris

Thomas Hug, Bank Julius Baer, Zürich

Joe Sullivan, Covington & Burling, Washington DC

Christian Wimpissinger, Binder Grösswang, Vienna

Reporter

Brian D Harvel, Alston & Bird, Atlanta

Introduction

The panel focused on the complexities expected to arise from the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two rules and the United States Global Intangible Low Tax Income (GILTI) and Book Minimum Tax provisions.

With the European Union Member States and many other countries in the world going ahead with the introduction of Pillar Two rules, US multinationals should assess how the US GILTI and Book Minimum Tax rules (and, going forward, non-US Pillar Two rules that will be implemented) will interact with the income inclusion rule, the undertaxed profit rule and the potential consequences of conceptual mismatches.

The panel addressed the complexities and discussed example cases, as well as operational and reporting changes, that multinational enterprises (MNEs) will need to consider.

Panel discussion

Introduction to the Global Anti-Base Erosion (GloBE) Model Rules and Pillar Two

As part of the OECD two-pillar approach, jurisdictions have four main rules to use for purposes of achieving the global minimum tax of 15 per cent: an Income Inclusion Rule (IIR), an Undertaxed Profit Rule (UTPR), a Switch-Over Rule (SOR), and a Subject to Tax Rule (STR). According to Kimberly Majure, a helpful way to piece the rules together is to start with an organisational chart and take a bottom-up approach to build up to the 15 per cent. Majure continued by walking through the ordering rules starting with the local tax and any qualified domestic minimum top-up tax (QDMTT), then looking for the closest shareholder with applicable controlled foreign corporation rules, applying an income inclusion rule at the parent level and, finally, utilising an undertaxed profits rule in other constituent entity jurisdictions. A significant issue to watch for is the creditability of new Pillar Two taxes, not only for Pillar Two purposes, but also for US foreign tax creditability purposes.

To begin with, these rules apply if a multinational enterprise has €750m in global turnover; however, countries can lower this threshold as part of implementation, and it is worth noting that the €750m is not adjusted by inflation. Margriet Lukkien stated that the Member States of the EU are required to implement the IIR this year and the UTPR next year. Lukkien expects the Netherlands to make its bill publicly available in May or June 2023. Laurence Clot added that France is also expected to release a bill by the end of the year. From a Swiss perspective, Thomas Hug shared that the process to adopt new legislation in Switzerland requires a public vote, which should make Switzerland the first country in the world to have a public vote on base erosion and profit shifting.

From an implementation standpoint, Clot pointed out that the difference between the EU and the OECD is that the EU rules are mandatory for Member States, while the OECD has no ability to make its rules binding. Furthermore, the rules in the EU apply even if all operations are in one country, while the OECD rules only apply if operations are at least in two countries. Notably, the EU Directive (2022/2523) on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the EU, otherwise known as the EU Minimum Tax Directive (Pillar Two), permits Member States with fewer than 12 Pillar Two taxpayers in their jurisdictions to defer application of Pillar Two for six years.

Majure added that these rules present a difficult choice about whether to adopt the rules. It can be difficult in terms of local legislative process, but if a country does not, another country could swoop in and collect the tax revenue. Christian Wimpissinger shared his views that the rules in the EU should be dynamic and should be updated based on new guidance from the OECD and that consideration should be given to forming a special court to ensure that the rules are enforced consistently across jurisdictions.

The US angle

Majure started off with the basic fact that the US rules do not match the OECD project. Mary Anne Buechel stated that the US’s new corporate alternative minimum tax does not qualify as a QDMTT under the OECD rules. Additionally, by not making any changes to the GILTI, the GILTI does not qualify as an IIR. Joe Sullivan shared that for some purposes, the US may be better off under the bottoms-up analysis because a controlled foreign corporation regime applies first when building towards the 15 per cent minimum tax. Even though the GILTI is not applied on a country-by-country basis, the OECD’s pragmatic formula to apply the GILTI as if it did, does provide some benefit at least for tax years ending on or before 30 June 2027.

Sullivan added that for foreign multinationals with US subsidiaries, the Base Erosion and Anti-Tax Abuse Tax (BEAT) presents questions on how it is treated for purposes of calculating effective tax rates. Given the difficulty in adopting new laws or even passing regulations, Majure fears that the US does not have enough time to modify or adopt rules to fill in all the gaps between the US tax rules and the OECD rules.

Tax policy

Several panellists questioned how the rules would impact policy decisions made by governments to encourage certain behaviour. For example, if one country offers a credit, rebate, or other tax incentive to reduce the tax rate in country, the benefit of that incentive would be erased by another country swooping in and charging a tax so that the company can get back to the 15 per cent global rate. These types of incentives are important for the climate and have various other positive impacts on society, and the question was asked whether the OECD should take into account public policy as part of it plans so that the global community continues to benefit from these public goods.

Transitional safe harbours

As part of implementation, the OECD has provided a safe harbour in an attempt to identify low risk tax jurisdictions where there is no top-up tax and where full-fledged GloBE compliance will not apply. To qualify, at least one of the following safe harbour tests must be met in the tested jurisdiction: (1) total revenue of less than €10m and average GloBE income of less than €1m (the ‘De Minimis Test’); (2) the group has an effective tax rate of at least the transition rate specified for the year (15 per cent for 2023 and 2024, 16 per cent for 2025 and 17 per cent for 2026) (the ‘Simplified ETR Test’); or (3) the group’s average GloBE income is no more than the substance-based income exclusion amount for entities resident in that jurisdiction (the ‘Routine Profits Test’). As Wimpissinger pointed out, one issue with the safe harbour is the amounts are in EUR and are not inflation adjusted, so foreign currency fluctuations could affect local entities on a yearly basis. From an industry perspective, Buechel thinks the safe harbour is great in theory and that the application of the De Minimis Test is straightforward, but the Routine Profits Test seems difficult to apply in practice, while the Simplified ETR Test may work effectively in certain situations. 

Conclusion and final remarks

A key takeaway from this presentation was that there are still a lot of hurdles in front of the OECD and the world when it comes to the implementation of Pillar Two. First, Hog pointed out that tax lawyers will need to understand International Financial Reporting Standards, US Generally Accepted Accounting Principles (GAAP), and/or local country GAAP to really be able to advise clients because of the reliance of tax rules on accounting concepts. The panel also discussed how Pillar Two seems to show a shift in the OECD’s approach from its focus on preventing the use of tax havens to avoid tax to a broader goal of having a minimum tax on operations regardless of location. Lukkien expressed concern over how controversies in one jurisdiction will affect the rules in other jurisdictions. Sullivan, Wimpissinger and Buechel all shared the belief that a centralised committee with authority to provide guidance quickly on narrow questions would be a welcome development for companies and practitioners. Clot shared her view that structures with minority shareholders will need special attention to make sure the costs and benefits are shared or split properly. Finally, Majure reminded everyone that the adoption of Pillar Two is cause for companies and advisors to create or revisit intragroup agreements to make sure they properly cover the tax benefit transfers, costs and unanticipated outcomes that are sure to arise following implementation.