In an interesting twist to the Pillar Two roll-out, last week (6 January) the Business at OECD (BIAC) issued a very negative open letter to the OECD’s Pillar Two working party. In the letter the BIAC identify: “two major policy issues which we believe may mean that the model rules cannot achieve their intended purpose (in addition to also identifying one overarching technical issue).” There have been numerous criticisms of the Pillar Two model rules, which were issued last month, but this letter stands out as particularly interesting because of who it comes from.
For those who have not come across the BIAC before, they are an international business network with a global membership representing over 7 million companies of all sizes. The key thing is that they are an officially recognised business voice to the OECD and according to BIAC’s website provide “strategic counsel on major policy decisions, peer reviews, and key OECD policy instruments.” This is therefore not a letter to be taken lightly.
As a result of these issues BIAC “respectfully” request that the OECD considers amending the relevant provisions in the model rules (which were published last month). If amendments are not made, the BIAC state that they “do not believe that the model rules can work to achieve the overall policy goals [the Working Party has] articulated”.
In brief the issues identified in the letter are set out below.
- Fundamental technical issue: complexity (anyone who has tried wading through the model rules will immediately agree with this conclusion). As BIAC point out, it’s not so much that one rule is complex but that the sum of so many rules together make something very difficult to follow.
- Fundamental Policy Inconsistency 1: under Article 4.1.5 top up tax can be owed in a jurisdiction even when there is no income for the year in that jurisdiction. BIAC note that “this tax charge, when there is no income, is fundamentally inconsistent with the overall policy goals”.
- Fundamental Policy Inconsistency 2: under Article 4.4.1 deferred tax attributes are limited to the minimum tax rate, even if the relevant jurisdiction has higher tax rate.
The letter goes on to say that even though these three issues are “potentially fatal” there are also a number of other issues that have been identified and that a follow up letter should be expected. As a hint of what’s to come, the letter concludes that the BIAC is “concerned that there are numerous other elements of the model rules which – while not rising to the level of fundamental technical or policy issues – could result in double taxation.”
This is unlikely to be the end of the story and it seems increasingly unlikely that the model rules will be finalised in their current form.
...the fact that we have only mentioned one technical issue, and two significant policy inconsistencies as being potentially fatal to the operation of the Model Rules, does not mean that we have not identified other technical or policy issues that we believe will need addressing