I think any tax professional who has been in the space for nine years or more will remember first learning the “BEPS” acronym in 2013, but I’m not sure any of us could have predicted how far we would come since that time, with more than 130 countries reaching political agreement on “A Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.” 1
The basics on Pillar 1
Put simply, the Pillar 1 rules would change how profits and taxing rights are allocated, using a formulary approach to recognize a portion of profits in market jurisdictions. This represents a fundamental shift in international tax policy. It is estimated that around $150B of profits will be reallocated under the new rules.
On February 4, the OECD launched the first of the anticipated public consultations on the draft rules by releasing for public comment the first building block of Pillar One Amount A – Draft Rules for Nexus and Revenue Sourcing.2 These are a “working version,” and do not yet reflect Inclusive Framework consensus on their substance.
The revenue sourcing rules are an important building block of Pillar 1 because they would determine whether an in-scope multinational enterprise has sufficient nexus to a participating jurisdiction for that jurisdiction to be entitled to any Amount A allocation, and if so, what its share of Amount A would be. The sourcing rules outline principles for identifying the market jurisdictions in which goods and services are used or consumed.
The basics on Pillar 2
Intended to discourage putting a floor on tax competition between countries and profit-shifting to low-tax locations by international groups, Pillar 2 proposes a form of global minimum tax levied at the rate of 15 percent.
The Global Tax Policy Leadership team at KPMG International has led the release of a series of analyses and resources for tax leaders and the public in response to the proposals under Pillar 2, including:
- A full analysis of the proposed Model Globe Rules for the Inclusive Framework on BEPS
- A short article detailing Ten points on how leaders can prepare for upcoming GloBE rules
- A webcast on the path ahead for BEPS Pillar 1 and 2 implementation
Considering these developments through a responsible tax lens
In many ways, the BEPS project has paved the way for meaningful conversations, consensus-building and collaboration on responsible tax, and the latest developments are groundbreaking in this regard.
While the progress is significant, there are still some questions to be addressed:
- How will countries respond? With the global framework in place, the question remains as to how individual jurisdictions will incorporate the proposed approach, which would in many cases change existing tax incentives and levers for attracting foreign investment.
- What will timing look like in different jurisdictions? The reforms are complex and could intersect with existing domestic rules. Differences in legislative processes could make it challenging to predict timing and monitor and track changes in laws across jurisdictions.
- What changes do businesses need to make to adapt? Tax leaders should be able to understand and explain to non-tax leadership how their tax profile may change under various scenarios, so they can help optimize the organization’s tax position in the changing environment.
Materials and webcasts will continue to be released as these developments unfold through the Policy Perspectives series.
As organizations of all sizes are ever more exposed to new trends in regulation, David Linke leads the Global Tax & Legal network of professionals in its efforts to work with multinational businesses to respond to those demands and create value. As a leading network, KPMG Tax & Legal professionals are focused on bringing our professional experience and acumen, our global capabilities and connectivity and technology-powered solutions to the most complex tax and legal challenges and transformation projects that tax leaders face.