A mix of potential measures affecting a broad range of taxpayers
The proposal forms part of the OECD’s programme of work on the tax challenges of the digital economy:
- Pillar One seeks to reallocate taxing rights towards consumer jurisdictions (see our tax flash of 9 October 2019 regarding the proposal for a Unified Approach under Pillar One)
- Pillar Two aims at ensuring that profits are subject to a minimum level of tax on a worldwide basis (so-called “global anti-base erosion” or “GloBE” proposal).
Both pillars would in principle target taxpayers in general (subject to certain thresholds and carve-outs), without focusing on pure digital economy actors or on technology-driven business models.
The OECD explores a mix of measures in the context of Pillar Two:
- On outbound payments: countries could limit the deductibility of payments and/or impose withholding tax at source if these payments are subject to low or no tax at the level of the recipient;
- On inbound payments: switching from a tax exemption to a tax credit method for double taxation relief purposes; and
- CFC-type of rules: including insufficiently taxed income of foreign branches and controlled entities.
Some of these measures would have to be implemented by amending tax treaties (e.g., the switch-over clause); others could be directly implemented in domestic legislation.
Key challenges of the measures explored under Pillar Two include (i) enforcing effective mechanisms to prevent or resolve double/multiple taxation situations, (ii) the potential complexity of the rules, (iii) the costs associated with compliance (both for taxpayers and the tax authorities), and (iv) achieving at least an OECD-wide consensus.
Stakeholders are for now called upon to provide technical input by Monday 2 December 2019 on three generic aspects of Pillar Two:
- The determination of the tax base and account for timing differences between tax systems;
- The extent to which a ‘blended’ tax rate could be invoked (to see if a minimum level of taxation is already attained) when part of the income is highly taxed and the other part is subject to low or no taxation; and
- What kind of thresholds and carve-outs would be appropriate.
We will keep you further informed of further developments. Should you have any question, please contact your trusted Loyens & Loeff adviser or a member of our digital economy taxation team below.