Pillar 2 implementation: latest updates and hot topics
Barbara Gangl
Binder Grösswang, Vienna
Report on the session of the Taxation Section at the 12th Annual London Finance and Capital Markets Conference in London
Monday 16 January 2023
Session Co-Chairs
Sylvia Dikmans Houthoff, Amsterdam
Jason Yen EY, Washington, DC
Speakers
Devon Bodoh Weil Gotshal & Manges, Washington, DC
Michael Hashemi His Majesty's Revenue and Customs, London
Nathaniel Carden Skadden, Arps, Slate, Meagher & Flom, Chicago
Michael Nordin Schellenberg Wittmer, Zurich
Andreas Trost Cuatrecasas, Barcelona
Mariana Eguiarte Morett Sanchez Devanny, Mexico City
Introduction
After the introduction of the panellists, the Session Co-Chair, Sylvia Dikmans, started by providing an overview of the agenda and the topics to be discussed. The topics addressed by the panel were the recent Organisation for Economic Co-operation and Development (OECD) guidance and United Kingdom implementation update; an overview of United States transactional issues; and updates on the Pillar 2 implementation in Switzerland, Spain and Mexico.
Panel discussion
Dikmans started with remarks on the status in the Netherlands, where a draft legislative proposal for consultation was published recently.
Jason Yen provided an overview of the recent guidance documents published by the OECD and handed over to Michael Hashemi, who described what the OECD has been doing over the last few years and what can be expected next from it. Hashemi continued by mentioning that the OECD has already identified certain outstanding areas in the UK. He considered the implementation of safe harbour rules to minimise extensive rules. Hashemi admitted that it is challenging to put together a comprehensive framework for these rules and stated that it would be very helpful to have a multilateral instrument that could ensure that different jurisdictions rule in the same sense. With respect to a new UK law that should be implemented until 31 December 2023, Hashemi noted that there is also an intention to implement an undertaxed profits rule (UTPR), but not before 31 December 2024.
Devon Bodoh continued with transaction issues based on a strong denial of what is going on in other countries. Bodoh explained why it is important to consider the Global Anti-Base Erosion Rules (GloBE) in transactions, although the rules have not been implemented yet. Bodoh presented a case concerning the sale of controlled foreign corporation (CFC) stock with a section 338(g) election, and the tax and accounting implications thereto due to GloBE. Nathaniel Carden added that his firm tries to find the best solution for the respective deals by twisting and turning the transactions. Bodoh confirmed this and Carden moved on to explaining the implications in the case of joint ventures. Carden described the allocation of the top-up tax to the consolidated owner based on an example and the differences that might occur if GloBE is implemented in certain resident countries of the group members. In the discussion that followed between Yen, Carden and Bodoh, Bodoh stated that it is difficult to give someone a model because it is very theoretical. Hashemi explained his opinion on the question from Yen regarding whether US regimes, especially global intangible low-taxed income (GILTI), were discussed in the UK, and the questions that might arise due the differences with respect to GloBE.
Michael Nordin provided an overview of the implementation of Pillar 2 in Switzerland, starting with the current status, and pointed out the key aspects of the Swiss proposal, which essentially follows the OECD model rules. Switzerland will levy a qualified domestic top-up tax and apply the income inclusion rule. Nordin mentioned the ongoing discussion with respect to the undertaxed payments rule and the practical difficulties expected, especially due to different accounting standards and different taxation rules. Answering the question from Yen regarding whether rulings would be negotiated in the future, Nordin stated that he does not expect a change to the system.
With respect to the possible guidance provided, Hashemi informed the audience that the rules are designed with specific questions in mind.
Nordin continued by discussing particular problems in Switzerland, in particular the main issues for Swiss banks.
Andreas Trost explained the current situation in Spain and the applicable CFC regime, which is very strong, and it appears that passive and base erosion income is included, even if the foreign group entity has substance. Answering the question from Dikmans concerning future developments, Trost mentioned that there have been no announcements, but he assumes that the tax authorities are drafting proposals. Further, Trost informed the audience that his firm has potentially 120 taxpayers that might fall within the scope of the measures.
Hashemi, Yen and Carden discussed incentives and the implications for structures.
Mariana Eguiarte Morett described the main tax benefits and challenges for the implementation of Pillar 2. Eguiarte Morett made it clear that Mexico wants to implement Pillars 1 and 2, but also wants to wait for the finished rules. According to Eguiarte Morett, the Mexican expectation is that they will result in an increase in tax collection. She stated that there are no incentives for shifting profits, and it is expected that the measures will avoid profit shifting. Further, Eguiarte Morett explained the CFC rules, income inclusion rule (IIR) and UTPR.
Conclusion and final remarks
Dikmans concluded by remarking that tax certainty (through safe harbours or rather, dispute resolution) is very important; therefore, certain items must be clarified because there are differences between the tax regimes of countries that might lead to distortion.