Key Points

  • US is pushing for very high turnover and profitability threshold on Pillar One of BEPS 2.0 which may solve current deadlock on its coverage
  • US tax reform proposals would align US system with current Pillar Two proposals with the possibility of a higher agreed minimum tax rate than currently expected
  • Although Australia’s largest mining companies have apparently been removed from Pillar Two they may yet get swept up in Pillar One
  • Australian multinational companies need to pay close attention to BEPS 2.0 in coming months as events are moving quickly in the lead up to the July 2021 Finance Ministers meeting where pressure for a consensus solution is very high

In detail

The indications from the February 2021 G20 Finance Minister meeting that the US was re-engaging with international cooperation in taxation and the BEPS process have quickly materialised in specifics, with the US now leading the way in the push for international consensus by mid-2021. The Biden administration has also released ambitious plans for US tax reform with a strong emphasis on the familiar refrain of ensuring that corporations pay their fair share of tax. This insight looks at the new developments both on the technical and political fronts.

Pillar One of BEPS 2.0: The digital economy

Pillar One proposes a new taxing right called Amount A which will allocate to the market jurisdiction a proportion of the global group profits of multinationals with a turnover above a specified threshold and providing automated digital services or being a consumer facing business.

The major development on Pillar One came at a meeting on 8 April 2021 of the Steering Group of the Inclusive Framework on BEPS when the US put forward a proposal designed to address the concerns raised in consultation last December and January about the complexity and breadth of coverage from the private sector and by governments about whether the target was the digital giants or a broader range of multinational companies.

The slideshow of the proposal was duly leaked and it involves narrowing down the companies which will be captured to about 100 multinationals globally using quantitative criteria based on a much higher turnover threshold than previously (USD20 billion instead of EUR 750 million) plus a profitability threshold (as yet unspecified) to capture the most profitable companies without any significant loss of revenue compared to the earlier proposal. This comprehensive approach avoids the difficulties of defining automated digital services and consumer facing businesses and also confirms that the US has completely abandoned the “safe harbour” proposal. Not surprisingly one of the recruits to US Treasury under the new Biden administration has been pushing variants on this idea.

The US justifies its approach by noting that they are designed to capture the companies earning large monopoly profits (economic rents), which certainly applies to the digital giants but also perhaps to Australia’s mining giants if the limit to automated digital services or consumer facing businesses is removed.

There are many other issues still up for discussion for Pillar One but this proposal may break the threshold disagreement that that has bedevilled discussion for more than a year. The US remains committed to binding dispute resolution to avoid double taxation and wants definitive commitments on which unilateral regimes would have to be rolled back (perhaps the MAAL and DPT in Australia) but has indicated a willingness to tweak the nexus threshold with a country in order to give a greater revenue share to small developing countries.

Pillar Two of BEPS 2.0: The global minimum corporate tax and US tax proposals

Much more is known or may be inferred about US ideas for the Pillar Two corporate minimum tax as they are mirrored in “The Made in America Tax Plan” released by the US on 7 April. Readers will recall that the two main proposals for Pillar Two involve a primary income inclusion rule (IIR) in the residence country of the multinational parent entity for income not taxed at an agreed minimum effective tax rate in the source country (computed on a country-by-country basis) combined with a secondary undertaxed profits rule (UTPR) for the source country to tax at the agreed minimum if there was no minimum tax levied further up the corporate chain. It seemed that the agreed minimum tax rate would be in the range of 10-15%

The major difficulty posed by the US for Pillar Two was that, while both elements were modelled on elements of its 2017 tax reform being the tax on global intangible low tax income (GILTI) and the base erosion anti-abuse tax (BEAT), they vary from the OECD proposals. The GILTI is based on a worldwide not country-by-country calculation and the BEAT does not need to be coordinated with the GILTI from a US perspective as it was directed mainly at non-US multinationals.

The new US tax plan proposes an increase in the corporate tax rate from 21% to 28% and associated reforms to the GILTI so that it operates on a country-by-country basis with a broader tax base through elimination of the 10% of tangible asset cost deduction and a minimum tax rate of 21% instead of 10.5%. The BEAT is proposed to be replaced by the Stopping Harmful Inversions and Ending Low-tax Developments tax (SHIELD) which would be levied at 21% like GILTI instead of the current 10% unless there is another rate agreed in OECD discussion for Pillar Two in which event that rate would apply (along with coordination with other countries IIRs).

In addition the lower tax rate of 13.125% on foreign derived intangible income (FDII – the US patent box) is proposed to be abolished and replaced with front end incentives for R&D. Finally the US inversion rules to prevent expatriation of US companies will be strengthened and, in a nod to Senator Warren, a 15% alternative minimum tax introduced based on book profits of US corporations, not taxable income, with credit for any foreign taxes paid. These are not directly related to Pillar Two but are further evidence of US determination to make large multinationals pay more tax. Even if BEPS 2.0 falls over the US may in any event be collecting a lot of the additional tax that it would produce.

As the US is now going along with the main elements of Pillar Two but at significantly higher rates one suspects that the quid pro quo may be a higher agreed minimum tax rate in the range of 15-21%. Sceptics are already suggesting that the 28% and 21% rates in the new proposals are ambit claims but the procedures used for the US 2017 tax changes have opened the way to passing tax legislation with only a bare majority in the US Senate rather than the 60% majority usually required under various procedural rules. The intention is to use the same approach in 2021. Donald Trump only gave up one percentage point for his desired corporate tax rate in 2017 (from 20% to 21%). Much may turn on what Democrat Senator Manchin from West Virginia decides.

Like Pillar One, Pillar Two involves many other issues but again it seems that the US has removed the logjam that it was creating and is pushing strongly for a consensus.

One of those other issues of great interest to Australia has apparently also been settled at the recent meetings – the removal of mining and energy companies from the scope of Pillar Two. If the US proposal for the threshold for Pillar One is entirely quantitative, however, it may be that Australia’s largest mining companies will at the same time get swept up in Pillar One.

The politics of BEPS

The main reason why the BEPS and global tax transparency reforms of the last decade have become possible has been the engagement of the politicians in the process at the G20 – if the politicians give their agreement in such a public forum they attend regularly, it is hard to backtrack. Politics can also act as a blocker as it did in the second half of 2020 (in the form of the run up to the US election).

It was recently noted by the French Finance Minister (who along with his German counterpart seems to talk on behalf of Europe) that both France and Germany have elections in the latter part of 2021 so that the time for BEPS action has to be the middle of 2021 and time is running short. While he welcomed the new US push for consensus he indicated that France and other EU countries are keeping their digital services taxes in place in the event of a failure to reach consensus at the Inclusive Framework and G20. The EU has even grander tax plans being designed currently for the digital economy, which may explain also the US push for much clearer identification of the unilateral tax measures that will need to be rolled back if BEPS 2.0 proceeds.

The other main player in the politics are smaller developing countries. They tend to act together and their involvement in the consensus is necessary to give the process global legitimacy. The UN is the main flag-carrier for these countries and in its own way is also raising the political pressure on a mid-2021 consensus. The UN last week released the revised version of its digital services tax provision for inclusion in treaties, which has in principle been approved for inclusion in the UN Model tax treaty and offers developing countries a much simpler alternative to Pillar One. Further the UN is during the next few months considering a proposal that it claim a much larger role as the global tax organisation, effectively as a replacement for the Inclusive Framework.

Although BEPS 2.0 is unlikely to have significant revenue impact on Australian multinationals and Australia’s corporate tax collections, apart perhaps in relation to Australia’s largest miners, it will have a very significant impact on international tax rules and compliance for all large global companies. Australian multinationals need to monitor the BEPS process as developments are likely to be rapid during coming months with the consensus, if any, emerging at the G20 Finance Ministers meeting on 9-10 July 2021.