Working together in the OECD/G20 Inclusive Framework on BEPS, countries and jurisdictions are implementing actions to tackle tax avoidance, ensuring a more transparent tax environment and addressing the tax challenges arising from the digitalisation of the economy.
From BEPS 1.0 to BEPS 2.0
In 2015 the G20 countries, together with the OECD, started to address the impact of erosion of the tax base and profit shifting. They were required to do so following the financial crisis of 2008 / 2009 and multiple international revelations about tax evasion and aggressive tax planning. The G20 initiatives started with the BEPS 1.0 Action Plans and resulted in numerous changes to international tax rules like Pillar One and Pillar Two.
The work did not stop there. Many countries believed that the BEPS 1.0 Action Plans did not address the digitalization of the economy. A number of countries took unilateral action and introduced a digital services tax. The objective of BEPS 2.0 was to reach a consensus on how to address these issues in order to avoid deranged efforts and double taxation.
Reforming international tax rules through Two-pillar approach
On July 1, 2021, 130 member countries in the OECD/G20 Inclusive Framework on BEPS (“IF”) provided a framework for reforming the international tax rules using a two-pillar approach. On October 8, 2021 a statement was released by the IF providing further insights into the two-pillar approach:
- Pillar One deals with the reallocation of certain profits from very large multinational enterprises (MNEs) to market jurisdictions.
- Pillar Two deals with a global minimum tax of 15%. This will be achieved through Global Anti-Base Erosion Rules, the GloBE Model Rules, including an Income Inclusion Rule and Undertaxed Profits Rule. A separate Subject To Tax Rule will apply to certain payments where the nominal tax rate falls below 9%.
Challenges BEPS 2.0
The OECD expects the BEPS 2.0 proposals to:
- reallocate taxing rights to market jurisdictions under Pillar One.
- increase global corporate income taxes through the introduction of Pillar Two.
There are potentially wide-ranging implications for most MNEs because BEPS 2.0 is not restricted to companies with digital operations and delivery models.
GloBE, Pillar One and Pillar Two timeline
- On December 20, 2021 the OECD published its Global Anti-Base Erosion (GloBE) Model Rules.
- On December 22, 2021 the European Commission published its proposal for an EU Directive to incorporate Pillar Two into EU law.
- With a targeted implementation as of 2023 for the Pillar Two (GloBE) Rules, the process of managing the impact of BEPS 2.0 will be challenging.
The GloBE Rules will have a significant impact on the Effective Tax Rate (ETR) of MNE groups. The rules are expected to result in many different implementation challenges. They will increase the administrative burden for MNE groups. Particularly in the context of the yearly ETR and top-up tax calculations based on jurisdictional blending. In the future, a great deal of data, including non-financial information, will be required across MNE groups. Some of this data will be difficult to gather and analyze. The potential tax impact could be significant, increasing cash tax cost and reducing earnings per share.
BEPS 2.0 expert team
How can we help you? Our expert team will help you assess how BEPS 2.0 is going to impact your organization. By combining our tax and legal expertise we are able to recommend and implement changes to your group, capital and/or intangible structure. Our proprietary BEPS 2.0 Modelling Tool will map the impact of BEPS 2.0 under various scenarios. We identify the data sources so you are able to assess whether, to what extent and in which countries your organization will be impacted by BEPS 2.0.
