The recent public consultations on Pillar Two and BEFIT

Dan Luchsinger

Covington, Washington, DC

dluchsinger@cov.com

Wiebe Dijkstra

De Brauw Blackstone Westbroek, Amsterdam

wiebe.dijkstra@debrauw.com

The IBA Taxes Committee submitted contributions in response to two recent public consultations on the Organisation for Economic Cooperation and Development's Pillar Two – on tax certainty for the Global Anti-Base Erosion Model Rules (GloBE) rules issued by the OECD's Inclusive Framework and on an EU common consolidated corporate tax base as part of the European Commission's Business in Europe: Framework for Income Tax (BEFIT) initiative. The Committee will also shortly submit contributions on the UN General Assembly Resolution 77/244, which is entitled ‘Promotion of inclusive and effective tax cooperation at the United Nations.’ We wish to express our gratitude to the committee members that have put together these focused and high-quality contributions on complex topics within a very tight timeframe. The contributions highlight the fundamental issues and challenges created by the respective proposals, and provide suggestions on how to address them. The contributions can be found on the websites of the OECD and the European Commission, respectively (see OECD and EU).

Pillar Two – tax certainty for the GloBE rules

This public consultation solicited comments on measures for ensuring the consistent application of the earlier proposed Pillar Two rules and guidance. Our comments focused on the anticipated disputes regarding the Pillar Two rules between participating and non-participating countries and related compatibility issues with existing treaties, especially with respect to the application of the undertaxed profits rule (UTPR). Further, we endorsed the advance pricing arrangement (APA) and International Compliance Assurance Programme (ICAP)-like processes to enhance (advance) tax certainty and reiterated earlier comments regarding possible administrative guidance and the implementation of an ‘EAGLE committee’ to facilitate guidance and dispute resolution. We also highlighted the importance of a multilateral convention, not only for agreeing on effective mutual agreement procedures (MAP)-like dispute resolution mechanisms, but also for the implementation of the GloBE rules themselves. Coherent and consistent outcomes cannot be guaranteed if the GloBE rules are only implemented in the domestic laws of participating countries. Additionally, thorny treaty compatibility issues will undoubtedly arise absent such a convention.

BEFIT – an EU common consolidated corporate tax base

This public consultation solicited input on the design of an EU common consolidated corporate tax base. The proposed tax base rules would result in the EU profits of above threshold companies being calculated on a consolidated basis, in accordance with common corporate tax base rules. These profits would subsequently be allocated to the relevant EU Members States based on a formulary apportionment mechanism and be taxed at the applicable rates by the respective Member States. We recognised the desired benefits of a common corporate tax system, including a reduction in the complexity of tax law and compliance and administration, and an increase in the attractiveness of the single market. At the same time, we noted that the adoption of a common corporate tax system within the EU is a serious and far-reaching project. Notably, we pointed out that formulary apportionment may result in the reallocation of the tax burden within the Member States and will likely raise far reaching political issues and choices. Success in achieving the policy objectives will depend on harmonising the interpretation and application, resolving disputes in an effective and efficient manner, and addressing the complications arising from the dealings between EU Member States and third countries. We highlighted the key technical issues and made suggestions with respect to the following fundamental topics: (a) the tax base determination, expressing a preference for using accounting standards as the basis for calculating the tax base; (b) formulary apportionment; (c) the interaction with third countries and tax treaties, highlighting the fundamental issues that would arise under the tax treaties with third countries, because the proposed tax base is incompatible with the current framework for international taxation that continues to apply in dealings between the EU and third countries; and (d) dispute prevention and resolution, expressing a preference for making the EU courts directly competent to decide on any disputes, but also providing alternative suggestions.

We will continue to seek active engagement on these fundamental developments in international tax law with the relevant institutions, and encourage committee members to participate and suggest initiatives.