BEPS Primer: Past, Present, And Future, Part 2 PDF

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® taxnotes © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. international Volume 99, Number 2 July 13, 2020 BEPS Primer: Past, Present, And Future, Part 2 by Jeffery M. Kadet Reprinted from Tax Notes Internaonal, July 13, 2020, p. 207 For more Tax Notes® International content, please visit www.taxnotes.com.  © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. COMMENTARY & ANALYSIS tax notes international® BEPS Primer: Past, Present, and Future, Part 2 by Jeffery M. Kadet erosion and profit-shifting project took a wait- Jeffery M. Kadet was in private practice for and-see approach,2 noting plans to produce a over 32 years, working report by 2020 reflecting the outcome of continued in international work on the issue of the digital economy. The taxation for several March 2018 interim report (a short 218 pages) major international acknowledged the differing views on how accounting firms. He features of highly digitalized business models and now teaches digitalization in general should affect international tax in the 3 international tax rules. Recognizing these LLM program at the differences, the inclusive framework decided to University of conduct further work on profit allocation and Washington School of nexus rules, with the goals of providing an update Law in Seattle. on this work in 2019 and reaching a consensus- In this two-part based solution by 2020. This process has been report, the author updates his examination of referred to as BEPS 2.0. the initial OECD base erosion and profit- In January 2019 the inclusive framework shifting project, and he considers the process issued a policy note announcing a two-pillar and potential success of BEPS 2.0. This final approach that would expand on the planned work installment focuses on BEPS 2.0 and the policy 4 issues to be resolved for consensus on pillars 1 specified in the 2018 interim report. While the and 2. first pillar would focus on the already identified allocation of taxing rights (that is, revising profit Copyright 2020 Jeffery M. Kadet. All rights allocation and nexus rules), the second pillar reserved. would be a broader attempt to address remaining 5 BEPS issues. Thinking outside the box, the policy Table of Contents note stated regarding pillar 1: VIII. BEPS 2.0............................207 The inclusive framework recognises that A. Background......................207 the implications of these proposals may B. Description of Pillars 1 and 2.......209 reach into fundamental aspects of the C. Reflections on BEPS 2.0 current international tax architecture. Pillars 1 and 2.....................216 Some of the proposals would require IX. Conclusion.........................222 reconsidering the current transfer pricing rules as they relate to non-routine returns, VIII. BEPS 2.0 A. Background 2 OECD, “Addressing the Tax Challenges Raised by the Digital 1 Economy, Action 1 — 2015 Final Report” (Oct. 5, 2015). As indicated in Part 1 of this report, the 3 OECD, “Tax Challenges Arising From Digitalisation — Interim October 2015 final report on action 1 of the base Report 2018” (Mar. 2018). 4 OECD, “Addressing the Tax Challenges of the Digitalisation of the Economy — Policy Note” (Jan. 23, 2019) (hereinafter, “policy note”). 5 1 See OECD, “Addressing the Tax Challenges of the Digitalization of Jeffery M. Kadet, “BEPS Primer: Past, Present, and Future,” Tax Notes the Economy — Public Consultation Document” (Feb. 2019) (hereinafter, Int’l, July 6, 2020, p. 51. “public consultation document”). TAX NOTES INTERNATIONAL, JULY 13, 2020 207 For more Tax Notes® International content, please visit www.taxnotes.com. COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. and other proposals would entail “Pillar Two focuses on the remaining BEPS modifications potentially going beyond issues and seeks to develop rules that would 9 non-routine returns. In all cases, these provide jurisdictions with a right to ‘tax proposals would lead to solutions that go back’ where other jurisdictions have not beyond the arm’s length principle. They also exercised their primary taxing rights or the go beyond the limitations on taxing rights payment is otherwise subject to low levels of determined by reference to a physical presence effective taxation.” (Thus, the goal is an generally accepted as another corner stone effective minimum tax on multinational 6 of the current rules. [Emphasis added.] enterprise profits.) Thus, the policy note was saying that for both Because the inclusive framework members profit allocation and nexus, solutions would apparently could not agree on any one of the require either abandoning or changing in some several specific pillar 1 proposals, the OECD manner transfer pricing and permanent secretariat took the initiative of issuing a public establishment concepts that have been at the heart consultation document in October 2019 that of international taxation policy and practice for melded the various approaches into one pillar 1 roughly a century. proposal that, with appropriate details to be In light of the inclusive framework’s need for negotiated, might form the basis for a resolution input from the many interested stakeholders to which all inclusive framework members could 10 (given both in written comments and in person agree. during public consultations), the members could Soon thereafter, in November 2019, the OECD not as a practical matter consider the issues only released a public consultation document on pillar 11 in private. At the same time, however, they would 2, seeking stakeholder input on technical issues. have difficulty approving the issuance of In late January 2020 the inclusive framework documents setting out positions and approaches issued a statement affirming the members’ to which they could not yet agree. This being the commitment to reach an agreement on a case, the policy note and the public consultation consensus-based solution for both pillars by the 7 12 document that was issued shortly thereafter end of 2020. The statement included in its Annex proposed the members’ ideas while specifying 1 an “Outline of the Architecture of a Unified that further work would be conducted on a Approach on Pillar One,” which would be the “without prejudice basis.” This was also true for basis for the negotiations necessary to reach later inclusive framework documents issued in consensus. Annex 2 described pillar 2, noting 2019 and early 2020. several design options that must be resolved for Those later documents refined the various consensus. proposals. A May 2019 document set out a Although any details are beyond the scope of program of work to make clear the objectives of this report, there have been other developments 8 pillars 1 and 2. It stated: outside the BEPS 2.0 process that focus on the “Pillar One focuses on the allocation of digitalization of the economy. For example, while taxing rights, and seeks to undertake a the focus of the inclusive framework’s work on coherent and concurrent review of the profit pillar 1 has been on the MNEs that conduct their allocation and nexus rules”; businesses wholly or partially through digital 9 Throughout this BEPS 2.0 section of the report, the words “jurisdiction” and “country” are used interchangeably. 10 OECD, “Secretariat Proposal for a ‘Unified Approach’ Under Pillar One — Public Consultation Document” (Oct. 2019). 11 6 OECD, “Global Anti-Base Erosion Proposal (‘GloBE’) — Pillar Policy note, supra note 4, at 2. 7 Two — Public Consultation Document” (Nov. 2019). Public consultation document, supra note 5. 12 8 OECD, “Statement by the OECD/G20 Inclusive Framework on OECD, “Programme of Work to Develop a Consensus Solution to BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising the Tax Challenges Arising From the Digitalisation of the Economy” From the Digitalisation of the Economy” (Jan. 2020) (inclusive (May 28, 2019). framework statement). 208 TAX NOTES INTERNATIONAL, JULY 13, 2020 For more Tax Notes® International content, please visit www.taxnotes.com.  COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. means, the Forum on Tax Administration has pricing or other valuation concepts to split focused on the businesses (including many that identified intangibles and synergies between, on are not digital businesses) that use digital one hand, an MNE’s central management, platforms to sell or otherwise distribute their research and development, production, and so products and services. In March 2019 the forum forth, occurring outside market jurisdictions, and issued a report, titled “The Sharing and Gig on the other hand, the factors occurring within Economy: Effective Taxation of Platform Sellers,” market jurisdictions. Rather, this split of residual intended to help in the development of legislative profit as a part of the amount A formula is one of models for standardized reporting by sharing and the many matters on which inclusive framework gig economy platforms. This led to the July 2020 members must agree. This split will likely release by the OECD of an Inclusive Framework- represent a political compromise rather than a approved set of “Model Rules for Reporting by targeted effort to achieve the overall BEPS goal of Platform Operators With Respect to Sellers in the aligning profits with value creation. Sharing and Gig Economy.” It should also be Because a calculation by each MNE of its noted that some jurisdictions around the world routine and residual profits for each of its in-scope have made efforts to treat gig economy workers as business lines would be subjective and time- employees despite their label as independent consuming, the inclusive framework could (1) contractors under the applicable contracts. agree on one routine profit level that would apply to all MNEs, or (2) decide on different routine B. Description of Pillars 1 and 2 profit levels for different business lines. With an The following descriptions reflect the early agreed level of routine profits, the formulaic 2020 status of pillars 1 and 2 as included in computation of the residual profits to be allocated annexes 1 and 2 of the January 2020 inclusive among all market jurisdictions would become framework statement. much simpler to apply. Once the market jurisdictions’ portion of 1. Pillar 1 residual profit is calculated, that portion must be a. The Basics of Pillar 1 and Amounts A, B, allocated among all eligible market jurisdictions. and C The basis for this allocation is yet to be precisely Pillar 1 introduces a new taxing right for defined, but it will generally be a sales factor that market jurisdictions. In concise terms, if an MNE includes revenue earned, whether from product meets specified scope criteria and nexus sales, cloud services, or other sources. Further, thresholds for itself and one or more of its sourcing rules for this sales factor must be agreed business lines, a market jurisdiction may tax an to. The inclusive framework statement, for allocated portion of that MNE’s residual profit. example, notes regarding online advertising that This allocated portion is referred to as amount A. source will depend on where an advertisement is Residual profits for this purpose are the excess viewed by a user rather than the location where of the groupwide profits (or groupwide profits for the advertising is purchased. a business line) over the routine profits from the As a simple example to illustrate this formula functions and activities that earn those profits. calculation of amount A, assume that an MNE These residual profits thus reflect the MNE’s headquartered and operating solely within intangibles and group synergies. Because these countries X and Y earns a groupwide profit of intangibles and synergies cover the entire MNE’s 125x through a single line of business for which business and amount A is only meant to allow sales revenue of 1,000x is earned solely from taxation of the residual resulting from market countries X (800x) and Z (200x). Assuming jurisdiction factors, the total residual must be split inclusive framework consensus as indicated, the so that only the market jurisdictions’ portion is amount A calculation for countries X and Z is allocated among the market jurisdictions. determined as follows: This split of the residual profits will not be a groupwide profits are 125x; fact-based determination on an MNE-by-MNE routine profits are 25x (consensus could be basis. Thus, there will be no application of transfer that routine profits are equal to 10 percent of TAX NOTES INTERNATIONAL, JULY 13, 2020 209 For more Tax Notes® International content, please visit www.taxnotes.com. COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. business expenses; assuming business As noted, amount A represents a taxing right expenses of 250x, routine profits would be that never existed before. Specifically, this 25x); expansion of taxing rights is the ability of the residual profits are 100x (125x total profits market jurisdiction to impose tax without the less 25x routine profits); MNE having any physical presence in that split of 100x residual profits to all market jurisdiction, either directly or through an agent. jurisdictions is 20x (consensus that 20 This means that a market country will be able to percent of total residual profits is include in its tax base amounts that are over and 13 attributable to market jurisdictions ); and above the arm’s-length returns from physical of the 20x, 16x is allocated to Country X and marketing, distribution, and other activities that 4x is allocated to Country Z (20 * 800/1,000 the MNE might be conducting locally. Thus, both and 20 * 200/1,000). traditional transfer pricing and PE concepts are being overridden. What is the concept behind amount A? MNEs operate in and earn revenue from many In contrast to amount A, which is a new taxing jurisdictions. In some cases, their businesses earn right, existing tax rules allow market jurisdictions significant profits not only from their own to tax amount B (profits from local baseline MNE operations and intangibles but also from market distribution and marketing) and amount C jurisdiction factors that can include, for example, (profits from other local activities and functions). user contributions, user networks, and user Regarding amount B, pillar 1 envisions agreement information. Even though these market on a standardized fixed-return approach to jurisdiction factors may economically represent calculating taxable profit that is based on the additional MNE intangible assets, current arm’s-length principle. A standardized approach international tax rules generally do not provide would be simplifying, allow certainty, and any mechanism for market jurisdictions to value significantly reduce transfer pricing disputes on and locally tax the MNE profits generated by the amount of profits that those distribution and those factors. In short, amount A represents a new marketing functions generate. As for amount C mechanism under which market jurisdictions (profit from locally taxable activities other than would be able to calculate and tax these profits. those covered by amount B), pillar 1 recognizes that there can be no standardized approach to This new taxing right for amount A does not determining local taxable profits. However, replace any taxing right that a market jurisdiction inclusive framework members recognize that might have under existing tax rules. Thus, the agreement on new enhanced dispute resolution same amount A will be calculated regardless of approaches could be beneficial. Although some whether the MNE has a physical presence or other members are understood to object to binding activities in the market jurisdiction that might arbitration, the inclusive framework’s January already attract local taxation. Further, consistent 2020 statement emphasizes the need to explore with this amount A mechanism not replacing any mandatory binding dispute resolution existing taxing rights, it also should not affect any mechanisms.14 other taxes such as VATs, excise taxes, or customs duties. Amounts A and B will apply to different business lines and sectors that have different characteristics and levels of profitability. As a result, significant work will be required to achieve agreement on both the amount A formula factors 13 The presumption is that the other 80 percent of the residual profit is and the amount B standardized returns. attributable to non-market-jurisdiction factors, which theoretically These three amounts — A, B, and C — are include an MNE’s central management, R&D, production, and so forth. The location of these non-market-jurisdiction factors might be solely in defined such that there should seldom be any the home jurisdiction of the MNE or in several jurisdictions. It is apparently assumed that this remainder of 80 percent of residual profit overlap. However, future work will focus on the will be taxed by the home jurisdiction and any other relevant jurisdictions. Although this may be the apparent assumption, as discussed later, many MNEs will likely continue to record profits within zero- and low-taxed jurisdictions rather than in the jurisdictions where 14 these various non-market-jurisdiction factors are located. See inclusive framework statement, supra note 12. 210 TAX NOTES INTERNATIONAL, JULY 13, 2020 For more Tax Notes® International content, please visit www.taxnotes.com.  COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. potential overlap of amounts A and C in not meeting the revenue threshold for a particular circumstances in which there are significant local market jurisdiction would be the only criteria for marketing intangibles. having a significant and sustained engagement with that jurisdiction. Thus, if the threshold is b. Scope met, the nexus requirement is satisfied, in which The proposed system’s coverage focuses only case the market jurisdiction could tax some on expanding market country taxing rights for portion of that MNE’s profits. For other in-scope consumer-facing businesses and those providing businesses, the nature of actual engagement with automated digital services. Thus, the system the market jurisdiction could be important. For generally would not apply to sectors seen as example, if an MNE is selling inventory into a outside those areas, such as extractive industries, market jurisdiction with no sustained interaction the financial services sector, and airlines and with the market, there would be no nexus and the shipping. Which business lines might be included MNE would be outside the scope of pillar 1. within these two areas and therefore within the Further work by the inclusive framework will be scope of coverage is a major issue that is subject to required, though, to agree on whether activities agreement. such as a limited physical presence (for example, The January 2020 inclusive framework a representative office) or targeted advertising statement included non-exhaustive lists of might cause a significant and sustained business lines that could be treated as consumer- engagement and thus create nexus. facing businesses or as providing automated Having thresholds for revenue by market digital services. The automated digital services jurisdiction, of course, implies a need for inclusive list includes search engines, social media framework agreement on source rules. Those platforms, online marketplaces, digital content source rules would be important not only to streaming, online gaming, cloud computing allocate revenue to determine nexus but also to services, and online advertising services. The allocate amount A profit among applicable consumer-facing businesses list includes personal market jurisdictions and thus determine the computing products, clothes, toiletries, cosmetics, quantum of amount A tax that can be assessed by branded foods, franchise models, and each market jurisdiction. automobiles. The statement also noted that those d. The Arm’s-Length Principle businesses would still be treated as consumer- Amount A goes outside the box by ignoring facing, even when they sell into countries only arm’s-length transfer pricing methods to achieve through unrelated distributors so that there are no an effective formulary tax base for market direct sales or other transactions with consumers. jurisdictions. Amounts B and C continue c. Thresholds and Nexus traditional transfer pricing concepts, but amount B’s adoption of a standardized fixed-return Another major issue subject to agreement is approach to allow easy tax base calculations for the setting of thresholds that would have to be MNEs conducting local distribution and met before pillar 1 would apply to a particular marketing functions intentionally substitutes MNE. Those thresholds include, for example, simplicity, certainty, and ease of administration MNE groupwide revenue, business-line revenue, for the theoretical accuracy of transfer pricing. business-line profitability, and level of revenue in Amount C applies to MNE activities and each market jurisdiction. This last threshold, functions within the market jurisdiction that go which is expected to differ by the size of the beyond the defined amount B functions. As such, market jurisdiction, would also be used as an traditional transfer pricing methods and important measure of whether a new nexus rule application would continue. To ease this process, has been met. however, as noted earlier, amount C contemplates Under that nexus rule, an MNE would have to agreement on enhanced dispute prevention and have a significant and sustained engagement with resolution procedures (which could, of course, be a market jurisdiction before that jurisdiction relevant beyond pillar 1 and are relevant to could tax amount A. For an MNE engaged in an further work on BEPS action 14 (making dispute automated digital services business, meeting or resolution mechanisms more effective)). TAX NOTES INTERNATIONAL, JULY 13, 2020 211 For more Tax Notes® International content, please visit www.taxnotes.com. COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. e. Additional Focus on Amount A before tax. With these differing bases for taxation, i. Profits Before Tax — The Starting Point any effort to avoid double taxation through either a foreign tax credit or an exemption is less than In contrast to the traditional international straightforward. Note as well that with the taxation separate entity and arm’s-length transfer assumption of no book-tax or other differences, it pricing concepts, the tax base for amount A will looks simple. However, an actual MNE will have be derived from an MNE’s consolidated financial multiple group members in many jurisdictions, accounts. The starting point will be the each of which may make varying contributions consolidated profit before tax. through their activities to the pretax consolidated Predictably, inclusive framework agreement profit. Beyond book-tax differences, there also will be required on many matters. For example, may be multiple business lines for which amounts how significant must out-of-scope business lines A are separately computed. be before an MNE may segment its accounts, Given the need for mechanisms that can thereby normally lowering the residual profit to alleviate double taxation, further inclusive be allocated among market jurisdictions? How framework work is required. That work will will accounting method and timing differences be include possible changes to existing treaties as dealt with? And what about the treatment of well as the exploration of a new multinational losses and loss carryforward rules? What if an instrument. MNE’s profitability varies materially between different business lines or geographic regions? iii. Tax Authority Administration What sourcing rules will apply for the allocation The amount A calculations for all market of the agreed portion of residual profits to market jurisdictions require a determination of MNE jurisdictions? residual profits and of the portion of those profits ii. Dealing With Double Taxation that will be allocated among all market jurisdictions. As such, both the determination of As explained earlier, market jurisdiction tax residual profits and the allocation computation on amount A is over and above any tax imposed should be subject to review and audit by these under normal taxation rules. For example, assume interested jurisdictions. Because separate reviews an MNE parent and its one subsidiary report and audits would be inefficient, pillar 1 envisions pretax profit of 60x and 40x, respectively. For and will work toward agreement on “a clear, simplification purposes, assume that both group administrable and binding process for early members are in high-tax countries (that is, the dispute prevention.” The January 2020 inclusive group has conducted no profit shifting into a no- framework statement provides a sense of the or nominal-tax jurisdiction). Also, there are no issues and the benefits of a strong dispute book-tax differences. All of the group’s pretax prevention process: profit of 100x has been reported to and taxed by the members’ respective countries of residence. It should provide early certainty, before However, because this MNE conducts an in-scope tax assessments are made, to prevent business, has nexus, and meets the relevant disputes from arising. Certainty should be thresholds for several market jurisdictions, it available over all aspects of Amount A, must pay tax on amount A to those jurisdictions. such as whether an MNE is in scope, the This represents double taxation. correct delineation of business lines, As will be appreciated, the taxes paid to the allocation of central costs and tax losses to two jurisdictions of residence reflect existing business lines, whether a nexus exists in a separate entity and transfer pricing principles. particular jurisdiction, and identification Thus, the parent pays tax to its residence of the relieving jurisdictions for purposes jurisdiction on 60x, and the subsidiary pays tax to of eliminating double taxation.15 its residence jurisdiction on 40x. By contrast, the taxes paid on each market jurisdiction’s amount A are in effect obligations of the MNE as a whole and are calculated based on its consolidated profit 15 Id. at Annex 1, para. 70. 212 TAX NOTES INTERNATIONAL, JULY 13, 2020 For more Tax Notes® International content, please visit www.taxnotes.com.  COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. A particularly interesting aspect on which MNE profit shifting, pillar 2 is broadly structured agreement will be required is how the amount A as a simple but blunt minimum tax, whose rate tax will be assessed and collected. With the goal of has not yet been agreed to. The thought is that designing new approaches to dispute prevention, MNE profit shifting would be discouraged to the thought is being given to how MNEs’ home extent that all shifted profits would be subject to at jurisdictions could take some sort of enhanced least this minimum tax. role. For example, perhaps tax authorities in an Although in concept a minimum tax might be MNE’s home jurisdiction could agree in advance both simple and blunt, its application is less than with an MNE on factors such as its in-scope simple. This is because the BEPS process cannot business lines and how to source revenue. The force the zero- or low-tax jurisdictions, into which agreed factors would allow a calculation of MNEs shift profits, to directly tax those profits at residual profits, the identification of market the minimum rate. Rather, the BEPS process can jurisdictions, and the allocation to those market only encourage the home jurisdictions of MNE jurisdictions of their portion of the MNE’s groups and the jurisdictions from which profits residual profits, thereby calculating for each its have been shifted to implement tax rules that amount A tax. Another possibility is for the counter the benefits of profit shifting. Those MNE’s home jurisdiction tax authorities to countering rules would result in at least the centralize collection of the amount A taxes and minimum tax being applied. remit them to the relevant market jurisdictions. The pillar 2 minimum tax would be This sort of approach would be particularly implemented through the following four rules, helpful to address situations in which an MNE detailed later, under some not-yet-agreed-to has no taxable presence of its own within a market priority: the income inclusion rule, the switchover jurisdiction. rule, the undertaxed payment rule, and the f. Alternative Global Safe Harbor System subject-to-tax rule. (Note that an MNE parent may As discussed in greater depth later, Treasury own a zero- or low-taxed MNE group member Secretary Steven Mnuchin in an early December indirectly through one or more intermediate 2019 letter suggested making pillar 1 a safe harbor companies in a chain. The jurisdiction of any such regime.16 Taking account of this, the inclusive intermediate company might treat that company framework’s January 2020 statement added the as a parent for application of these pillar 2 rules. consideration of an alternative global safe harbor For simplicity of discussion, I will refer only to the system. Under such a system, the application of jurisdiction of the MNE parent.) amount A taxation would not be mandatory. a. Issues to Be Resolved Rather, it would apply only to MNEs that elect into the system. Before describing the four rules, it is important to first mention three issues that 2. Pillar 2 determine whether any of the rules will apply: Pillar 2, the global anti-base-erosion proposal, carveouts; is general in nature and focuses on remaining how the effective tax rate is to be calculated; BEPS issues. It also takes into account the and common BEPS structuring under which MNEs the minimum tax rate. move profits into zero- or low-tax jurisdictions. To be effective at all and apply to a wide range of These are all major issues that will require extensive work and compromise for the inclusive framework to reach any consensus. i. Carveouts The issue of carveouts refers to the possibility 16 that operations or activities of MNEs or their Letter from Mnuchin to OECD Secretary-General Ángel Gurría (Dec. 3, 2019). Later, in a letter dated June 12 addressed to the heads of group members in some sectors might be exempt finance of France, Italy, Spain, and the United Kingdom, Mnuchin from the pillar 2 minimum tax. Also, some size repeated this in stronger terms, saying, “It is also the position of the United States that Pillar 1 must be implemented on a safe harbor basis.” thresholds are being studied. For example, should TAX NOTES INTERNATIONAL, JULY 13, 2020 213 For more Tax Notes® International content, please visit www.taxnotes.com. COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. the €750 million revenue threshold used for tax rate of 15 percent along with MNE groupwide country-by-country reporting be used to carve out blending. In that case, an MNE that operates a relatively smaller MNEs from pillar 2 coverage? significant portion of its business within countries with tax rates of 25 percent would be able to ii. Effective Tax Rate continue shifting profits into zero- or low-tax In determining an effective tax rate, there are jurisdictions as long as the groupwide effective several possible calculation approaches. For rate did not fall below 15 percent. On the other example, should the tax used in the numerator be hand, if entity blending were applied, the 25 the cash paid or the tax as reflected under accrual percent taxes paid by other group members accounting in financial statements? As for the would not shelter profits shifted into less-than-15- denominator, should the tax base be calculated on percent jurisdictions. Illustrating the accounting income or on income as adjusted for interrelatedness, when groupwide blending tax purposes? If on an accounting basis, how applies and the minimum rate is increased above should book-tax timing and permanent 15 percent, the amount of profits that could be differences be treated? What materiality criteria shifted into zero- or low-tax jurisdictions would should be applied? What is included in the tax fall. base? Is the calculation to be made on a Note that blending by jurisdiction would transaction-by-transaction basis, a business-line allow some country tax competition to continue. basis, an entity basis, a jurisdictional basis (for For example, again assume a 15 percent minimum example, including all MNE group members tax rate. Many countries have previously offered resident in the jurisdiction and permanent tax holidays or other incentives to encourage establishments in the jurisdiction of other group inbound investment. Say that that country’s members), or an MNE groupwide basis? normal tax rate is 25 percent, but it will allow a If the calculation is not on a transaction-by- five-year tax holiday for a new investment project. transaction basis, income that has been subjected In such a case, an MNE that already operates in to different levels of taxation may be included in that country through one or more existing group the tax base. Those different levels will depend on members making profits taxable at 25 percent the nature of the operations that generate the could initiate a new project in an existing or new income and on the multiple jurisdictions that are group member that would pay zero tax for five subjecting the different items of income to tax years. As long as the average tax rate that MNE (perhaps including tax paid by shareholders group members within that jurisdiction pay is 15 under controlled foreign corporation rules). All of percent or more, no pillar 2 mechanism would this means that high-taxed income and low-taxed apply to impose any additional tax. income will be mixed in the effective tax rate calculation. The issue of what is included in the b. The Four Rules tax base is being referred to as blending. (Except i. Income Inclusion Rule when otherwise indicated, the discussion in this The income inclusion rule anticipates that an BEPS 2.0 section assumes for simplicity that a MNE home country will impose tax at the transaction-by-transaction approach is used, minimum rate or more on resident shareholders although it is doubtful that this would be the of foreign corporations if the corporation’s income approach ultimately agreed to.) has not been subjected to an effective rate of tax of iii. Minimum Tax Rate at least the minimum rate. Thus, this would act as The setting of a minimum tax rate is self- a top-up so that the combined tax paid on the explanatory, although the level of that rate income by the corporation and the shareholder(s) combined with whatever blending approach is would at least equal the minimum rate. agreed to will be critical to whether pillar 2 is Presumably, this approach would include an FTC successful in curbing BEPS behavior. mechanism to achieve the top-up effect when Although the effective tax rate and the there has been some foreign taxation of the minimum tax rate are separate issues, their effects relevant income. are interrelated. For example, assume that the The income inclusion rule resembles the basic inclusive framework decides to apply a minimum structure of CFC rules. (See the discussion of 214 TAX NOTES INTERNATIONAL, JULY 13, 2020 For more Tax Notes® International content, please visit www.taxnotes.com.  COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 17 action 3 in Part 1 of this report. ) As such, because The rule is implemented by disallowing a many jurisdictions that are home countries of deduction for the profit-shifting payment (for MNEs already have CFC rules in their domestic example, an interest or royalty payment) or by laws, they should have little difficulty amending making some other appropriate adjustment for those laws and implementing this portion of pillar intragroup payments. 18 2. iv. Subject-to-Tax Rule ii. Switchover Rule The subject-to-tax rule also applies to the CFC rules most commonly apply when country from which the profits have been shifted. domestic shareholders earn income through one In short, rather than disallowing a deduction or or more foreign subsidiaries. This is because a making some other appropriate adjustment in the foreign subsidiary is normally not a direct tax computation of the group member making the taxpayer in relation to the home country. CFC payment, the subject-to-tax rule would impose a rules address this by imposing tax on domestic withholding tax or other tax on the group member shareholders, with that taxation being measured that receives the payment. The rule would also by the income recorded within the foreign deny treaty benefits that would otherwise apply, subsidiary. such as a reduction or elimination of withholding Some territorial system countries exempt the taxes. The subject-to-tax rule might also apply to income earned by foreign branches under some interest or royalty payments made to specified circumstances under domestic law or unrelated persons. through tax treaties. Where such an exemption c. Applicability of the Rules to Specific causes branch income to be taxed at less than the Jurisdictions minimum rate, the switchover rule would require Although the four rules are presented as if the home country to impose tax of at least the they have equal weight (they appear in four bullet minimum rate on the otherwise exempted income points in the January 2020 inclusive framework and allow an FTC for any foreign taxes paid. The statement), they could not operate with equal January 2020 inclusive framework statement says weight. The income inclusion rule and the this would apply only when the exemption arises switchover rule apply to MNE home-country 19 under a tax treaty. jurisdictions, while the undertaxed payment rule The idea behind this switchover rule is simply and the subject-to-tax rule apply to jurisdictions to equate the treatment of foreign income that is from which profits have been shifted. As such, in earned within a foreign branch with the income amending their domestic laws to implement pillar earned within a foreign subsidiary. The rule 2, each jurisdiction will have to determine which would apply not only to an operating branch but rule or rules are appropriate for its situation. also to any foreign immoveable property that is For example, focusing on the income inclusion exempt from the owner’s home-country taxation rule and the switchover rule, consider a under an applicable treaty. territorial-system country that taxes neither the iii. Undertaxed Payment Rule income of foreign branches nor dividends paid by a resident’s foreign subsidiaries. That country In contrast to the income inclusion rule, which might implement both a CFC-like regime under allows the MNE home country to impose tax, the the income inclusion rule and provisions under undertaxed payments rule is implemented by the the switchover rule that treat foreign branches country from which the profits have been shifted. under domestic law and treaties the same way that foreign subsidiaries are treated under the CFC rules. On the other hand, a country that under domestic law and treaties taxes the income 17 Kadet, supra note 1, at Section IV.C. of a resident’s foreign branches and allows FTCs 18 For discussion of the use of CFC rules as an alternative to this for foreign taxes paid on that income would likely minimum tax approach, see Brian J. Arnold, “The Evolution of not need to implement the switchover rule. Controlled Foreign Corporation Rules and Beyond,” 73 Bull. Int’l Tax’n 631 (Dec. 2019). A source country might choose either the 19 Inclusive framework statement, supra note 12, at Annex 2, para. 14. undertaxed payment rule or the subject-to-tax TAX NOTES INTERNATIONAL, JULY 13, 2020 215 For more Tax Notes® International content, please visit www.taxnotes.com. COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. rule as its sole mechanism. On the other hand, it unified approach in October 2019 allowed the might choose one rule for some types of profit- process to move forward. More recently, despite shifting payments and the other rule for other the disruption of the COVID-19 crisis and types. lockdowns, the OECD has continued working A final point is that a jurisdiction can have a hard to keep to the goal of reaching a consensus dual status as a home to domestic MNEs and as a on pillars 1 and 2 by the end of 2020. As a jurisdiction from which foreign-based MNEs shift reflection of this, in a May 4 webcast, the OECD profits. This will be the case for many confirmed that planned July 2020 inclusive jurisdictions. They will likely choose to framework meetings had been postponed to implement the income inclusion rule and/or the October, but it also said that the timeline for switchover rule, as well as the overpayment rule reaching consensus on a solution by the end of 20 and/or the subject-to-tax rule, to take account of 2020 had not changed. that dual status. Pascal Saint-Amans, the director of the OECD d. Priority of the Rules Centre for Tax Policy and Administration, commented in the webcast on the current The four rules can overlap because they motivations for these continued efforts. He anticipate that two types of jurisdictions will be mentioned as offsetting forces the increasing able to impose additional taxation when the number of unilateral implementations of digital minimum tax rate has not been met: the MNE’s service taxes21 and the U.S. threat of trade home jurisdiction and the jurisdictions from sanctions against those countries. He believes that which profits have been shifted. those factors create strong momentum to reach With that in mind, recall that the inclusive some sort of consensus, especially on pillar 1, framework has not yet agreed on the priority in because consensus would mean a commitment by which these rules will be applied. To understand inclusive framework members to implement this issue, assume Company A owns subsidiaries pillar 1 and at the same time withdraw any B and C and that A, B, and C are resident in unilateral DSTs or other relevant taxes they have countries X, Y, and Z, respectively. Countries X implemented. and Z each have a 25 percent tax rate, while Emphasizing how importantly the OECD Country Y has a zero tax rate. Assume further that views a successful consensus, OECD Secretary- B and C have executed a license agreement under General Ángel Gurría’s remarks in May 2020 were which C pays deductible royalties to B and that reported as follows: Country Z applies no withholding taxes to royalties. Without agreement on the solution, some Countries X and Z could each apply a 40 or 50 countries “will feel the absolute different rule to impose additional tax. Because political imperative to tax the digital this would result in double taxation, there must be economy themselves, each one on their a clear priority of application. As noted, there is own,” which may draw the ire of the still no agreement on this important issue. United States, Gurría said. He pointed to the recent threats from the United States to C. Reflections on BEPS 2.0 Pillars 1 and 2 slap retaliatory tariffs against France after it introduced a digital services tax, which 1. Thoughts Applicable to Both Pillars the U.S. government views as a. Drive to Reach Consensus The OECD’s timely release of the October 2015 final reports for the 2013-2015 BEPS project reflected a high level of work discipline. That level 20 OECD, “OECD Tax Talks #15” (May 4, 2020). of discipline continues under the work on BEPS 21 DSTs are generally withholding taxes imposed on the gross receipts 2.0. For example, when inclusive framework of foreign taxpayers providing cloud services, including internet-based advertising. With the delay and uncertainty of the success of BEPS 2.0, 14 members were unable to agree on any one of the European countries and several non-European countries have already several proposals under discussion in mid-2019, enacted or are considering DSTs. See Elke Asen, “Digital Services Taxes in Europe,” Tax Foundation (Mar. 16, 2020). If the BEPS 2.0 process fails, the OECD secretariat’s initiative in proposing a it is likely that many more countries will follow suit. 216 TAX NOTES INTERNATIONAL, JULY 13, 2020 For more Tax Notes® International content, please visit www.taxnotes.com.  COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. discriminatory against American the United States’ belief that the goals of companies.22 pillar 1 could be “substantially achieved” through a safe harbor regime; and b. Timing the United States’ support for a “GILTI-like” In the May 4 webcast, the director said the pillar 2 solution, referring to the global hope is to present a full package covering both intangible low-taxed income regime. pillars 1 and 2 in October for consideration by the G-20 in November. Given the difficulties of the Interestingly, the letter made clear that the issues and the ongoing COVID-19 situation, he U.S. position on pillar 1 was “based on extensive said this could slip to some extent into 2021, consultations with taxpayers.” This presumably especially regarding pillar 1, for which some sort refers to U.S.-based MNEs, many of which are the of staggered process might be necessary. direct targets of DSTs, and some of which would Irrespective of any slippage, he anticipates that become taxpayers in many market jurisdictions both pillars will be implemented in 2021. under pillar 1. With the U.S. position being so influenced by taxpayers, it seems unlikely that c. Varying Weights of Inclusive Framework BEPS 2.0 will achieve consensus with any Members and Potential Effect on Consensus meaningful terms above some lowest common Virtually all jurisdictions (presumably, aside denominator. from most no- or nominal-tax jurisdictions) As noted earlier, Mnuchin’s letter prompted would benefit from a strong worldwide tax the inclusive framework to add to its planned system that allows them to impose tax on all MNE work the consideration of an “alternative global profits with neither double taxation nor double safe harbour system,” as reflected in the January nontaxation. Despite the benefits, differences in 24 2020 statement. Under that system, application perceived national interest make the attempt to of amount A taxation would not be mandatory; achieve such a system through the ongoing OECD rather, it would apply only to MNEs that elect into and inclusive framework process an act of the system. If such a voluntary system were compromise. Consensus can be achieved only if implemented, and especially if few MNEs elect in, enough countries can agree on something. it seems likely that market jurisdictions would be Considering the need for consensus, George under heavy pressure to ignore any inclusive Orwell comes to mind. Paraphrasing him loosely, framework commitment to eliminate unilateral it may be said that some countries are heavier measures. Their only practical recourse would be than others. In early December 2019 the United to continue existing DSTs or initiate new ones and States presented its position on BEPS 2.0 through perhaps expand other domestic laws that would a letter from Mnuchin to the OECD secretary- provide mechanisms to tax MNEs that do not general.23 The letter, which was particularly elect into the pillar 1 system. Thus, such a candid, noted: voluntary system would seem to encourage the the need “to prevent the proliferation of unilateral DSTs that the United States is so unilateral measures, like digital service concerned about. taxes”; d. A U.S.-Inspired Fly in the Ointment the United States’ “strong concerns” about any potential mandatory departure in pillar Despite all of the drive toward reaching 1 from long-standing arm’s-length transfer consensus, the latest adverse event came on June pricing and taxable nexus standards; 12, with the issuance of a letter from Mnuchin to the heads of finance of France, Spain, Italy, and the United Kingdom. This letter has brought both the planned BEPS 2.0 timeline and the BEPS 2.0 process itself into question. 22 See Stephanie Soong Johnston, “OECD Chief Warns of ‘Messy’ Outcome Without Digital Tax Deal,” Tax Notes Int’l, June 1, 2020, p. 1069. 23 24 Mnuchin letter, supra note 16. Inclusive framework statement, supra note 12, at Annex 1, para. 90. TAX NOTES INTERNATIONAL, JULY 13, 2020 217 For more Tax Notes® International content, please visit www.taxnotes.com. COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. According to Mnuchin’s letter and various them already may no longer continue to reports,25 the secretary stated that discussions hold them back. This, in turn, would were at an “impasse” concerning pillar 1. trigger tax disputes and, inevitably, Specifically, Mnuchin charged that the four heads heightened trade tensions. A trade war, of finance had rejected the U.S. position that especially at this point in time, where the “Pillar 1 must be implemented on a safe harbor world economy is going through a basis.” Further, he said that a joint proposal of the historical downturn, would hurt the four heads of finance for a “phased economy, jobs and confidence even implementation of Pillar 1” was unacceptable. further. A multilateral solution based on Mnuchin is objecting to the application of pillar 1 the work of the 137 members of the first to automated digital service businesses — a Inclusive Framework at the OECD is 27 sector in which U.S. MNEs dominate — and only clearly the best way forward. later to consumer-facing businesses. The four heads of finance replied to Mnuchin’s In addition to saying that any reform “must letter in a letter dated June 17. Showing a lighter apply on a broad basis and must not place touch, their letter calmly set out background financial burdens predominately on the including that it has now been seven years since businesses and the fiscal interests of a single the OECD and the G20 recognized issues with the country or industry,” Mnuchin repeated U.S. digital economy. Noting that the United States has opposition to DSTs. He again warned that “the been a full participant in the work since then, it United States will respond [to DSTs] with said that U.S. positions and proposals “have appropriate commensurate measures.” always been respected and taken into account In some contrast to his strong talk, the despite the various countries’ concerns and secretary said that after a pause in discussions, he interests.” It added that even though the United wanted to resume talks later this year. States has never explained the safe harbor It is important to note that the secretary’s approach it says it wants, the inclusive framework concerns are solely with pillar 1. The letter is considering it, a fact evidenced by its inclusion indicates that pillar 2 discussions are on track and in the January 2020 statement. 26 closer to agreement. In contrast to Mnuchin’s insistence that the Mnuchin’s letter brought a swift reaction from ongoing pandemic should be a reason for Gurría, who said in a June 18 OECD release: delaying the BEPS 2.0 process, the four heads of All members of the Inclusive Framework finance find that the pandemic amplifies the should remain engaged in the negotiation compelling need to reach a political agreement, towards the goal of reaching a global saying that such an agreement would avoid the solution by year end, drawing on all the need for individual governments around the technical work that has been done during world to take unilateral actions such as the last three years, including throughout implementing DSTs. Further, they expressed their the COVID-19 crisis. Absent a multilateral belief that a “phased approach” that deals first solution, more countries will take with automated digital services would ease the unilateral measures and those that have development of consensus and “pave the way for possible transitional solutions to be discussed with the United States, notably with respect to existing or upcoming national digital service 25 Mnuchin letter, supra note 16. See also William Hoke, “U.S. Says taxes.” OECD Talks on Digital Economy Have Hit an Impasse,” Tax Notes Federal, June 22, 2020, p. 2171; and Sam Fleming et al., “US Upends Regarding the motivations behind the letter, is Global Digital Tax Plans After Pulling Out of Talks With Europe,” there some genuine tax policy concern? Or is this Financial Times, June 17, 2020. 26 It seems likely that this comfort with pillar 2 reflects an expectation on the part of Mnuchin that pillar 2 would have little or no effect on U.S. MNEs. See the discussion in Section VIII.C.3.b. below suggesting that the 27 United States would push for special treatment or grandfathering under OECD release, “OECD Secretary-General Angel Gurría Has which the existing GILTI rules would cause all CFCs of U.S. Reacted to Recent Statements and Exchanges Regarding the Ongoing shareholders to be treated as satisfying pillar 2’s minimum tax rate Negotiations to Address the Tax Challenges of the Digitalisation of the requirement, thereby eliminating any pillar 2 concerns for U.S. MNEs. Economy” (June 18, 2020). 218 TAX NOTES INTERNATIONAL, JULY 13, 2020 For more Tax Notes® International content, please visit www.taxnotes.com.  COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. perhaps simply a reflection of a president who no doubt succeed in largely circumventing the prides himself on his ability to conduct tough pillar 2 minimum tax so that significant base negotiations? erosion will continue. In the mid- to longer term, One can only speculate about the potential this will increase recognition of the current effects of the secretary’s letter. Will it derail the environment’s shortcomings and the need to entire BEPS 2.0 process and lead to a relative embrace a solution that truly changes the chaos of 40 or 50 unilateral DSTs combined with environment — that is, the adoption of a unitary 28 U.S. retaliation through trade war tactics? Or will system or a full inclusion system. all soon be back at the table continuing g. Tax Treaties discussions? Given the downside to the United Many tax treaties would have to be changed to States of no consensus, along with the potential properly implement pillars 1 and 2 as now change in administration after this year’s outlined. This would require that existing treaties presidential elections, the U.S. government might be separately renegotiated or, more likely, that the transition into a less confrontational form. Even if action 15 multilateral instrument be expanded or that occurs, though, it seems likely that the United that a new similar instrument be initiated to put States will continue to push for agreements on pillars 1 and 2 that are little different from what necessary treaty changes into effect. Important are presumably its current negotiating positions: reasons for considering a new instrument include (1) to minimize market jurisdiction taxation under that (1) the United States is not a signatory to the pillar 1’s amount A and (2) to grandfather the U.S. action 15 MLI, and (2) pillar 1 involves many GILTI rules so that all U.S.-shareholder-owned jurisdictions that will not have existing treaties CFCs meet the effective tax rate test under pillar 2. between them that can be amended to allow for amount A taxation and provisions that will e. Thresholds eliminate double taxation. It seems likely that pillars 1 and 2 will both h. Compliance Burden have thresholds that would exclude many sizeable MNEs from coverage. For example, the Minimizing compliance burdens on MNEs is inclusive framework’s January 2020 statement one of many factors that inclusive framework mentions the €750 million revenue threshold used members must consider in trying to reach a for action 13 CbC reporting as a possible consensus on policy and on detailed threshold. Many MNEs excluded from coverage implementation of both pillars. Reducing that under such a high threshold may be material to burden to the extent possible is appropriate, of the economies of midsize and smaller countries. course. Relatively speaking, however, it seems likely that there will be a high correlation between f. An Inadequate Solution? the level of burden an MNE faces and how Pillar 1 leaves in place all the problems from aggressively that MNE has shifted profits through the current environment and serves only to dozens or even hundreds of group members, placate some market countries with the ability to many of which were established primarily for tax what will likely be a very small slice of MNEs’ some tax objective. residual profits. Pillar 2 in essence admits the relative failure of the BEPS project’s efforts to date 2. Pillar 1. because of the need for a broad minimum tax that a. Market Jurisdictions’ Split of Residual would be applied to companies in tax havens and Profit other low-taxed countries. There is as yet no indication of the percentage Assume that there is an international split of an MNE’s residual profit that would be consensus and individual countries follow up to apportioned to all market jurisdictions under enact domestic legislation and make any amount A. As indicated earlier, this percentage necessary tax treaty changes that allow both will probably reflect more of a political pillars of BEPS 2.0 to go into effect. If the pillar 2 minimum rate is set at a low level (say, 15 percent or less, which seems likely), and especially if 28 groupwide blending is allowed, many MNEs will See Kadet, supra note 1, at Section V. TAX NOTES INTERNATIONAL, JULY 13, 2020 219 For more Tax Notes® International content, please visit www.taxnotes.com. COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. compromise than an effort to reach an b. Amount B — Possible Effect on Local economically supportable result. With the relative Country Audit Process weight of the United States and the need for U.S. Amount B contemplates standardized returns agreement for BEPS 2.0 to succeed, it seems likely on distribution and marketing activities that will that any agreement will result in a relatively small allow real simplification while still holding true to percentage of residual profit going to market the arm’s-length principle. To achieve this, jurisdictions. however, amount B is expected to define baseline With that possibility in mind, it is interesting activities assuming “routine levels of to note the United States’ use of a 50-50 split in its functionality, no ownership of intangibles and no sourcing rules when a foreign producer sells or limited risks.” When that assumption is not through a U.S. sales office. Before the Tax Cuts true for an MNE’s operations in a market and Jobs Act, this 50-50 split applied for all jurisdiction (for example, there are locally situations in which the production of a product developed marketing intangibles, local personnel occurred in one country and its sale occurred in make credit decisions, and so forth), those another country, with one of the two countries beyond-baseline functions and activities would be being the United States. Although this 50-50 split taxable under amount C using traditional arm’s- no longer applies to the sale of products produced length transfer pricing. in the United States and sold outside the United In theory, this works well and makes sense: States, proposed regulations released in Simplify the process for all routine activities and December 2019 (REG-100956-19) continue to achieve pricing results that are reasonably within apply it to foreign producers that sell into the arm’s-length concepts. The accuracy is not perfect, United States. This sourcing is important for but it is close enough given the benefits of purposes of the effectively connected income certainty and ease of administration. And rules, which are the U.S. rules that correspond to functions, activities, and local intangibles that are what other countries typically refer to as taxing beyond the baseline are identified and pushed profits attributable to a PE.29 into amount C, under which, if there are any The amount A residual profit split and the disputes, there will be enhanced dispute U.S. 50-50 sourcing split are not directly resolution mechanisms available. comparable. For example, the amount A split is In practice, there will likely be many applied to residual profits, while the U.S. sourcing situations in which local functions, activities, and split is applied to gross income (gross receipts less assets go beyond the baseline. Of course, local tax the cost of sales). However, given that U.S.-source authorities can pursue additional tax under income after allocation of expenses would reflect amount C. Despite this ability, however, it seems a business’s intangibles, there is perhaps some inevitable that many MNEs will claim that their ability to compare these two splits. If the amount local activities do not extend beyond the baseline. A split as finally agreed to provides market Acceptance of these claims and the application of jurisdictions only a small slice of MNE residual the standardized fixed return will be simple for profits, this U.S. sourcing rule may add to the local tax authorities. Indeed, it is likely that they questioning of whether BEPS 2.0 is an adequate will seldom conduct the difficult and time- solution. consuming audit work necessary to identify any local activities or assets that extend beyond the baseline. If the inclusive framework agrees on, or local tax authorities impose, increased amount B disclosure requirements providing a full description of local functions, activities, and 29 Of course, income sourcing is also relevant to the FTC limitation assets, local tax authorities would at least be formula, which will often be important when the foreign producer selling into the United States is a CFC or has sufficient U.S. ownership. alerted to situations that might warrant their This affects the source of income of persons who have subpart F, GILTI, further attention. In the absence of such or qualified electing fund income inclusions or who receive specific interest or dividend payments from the foreign producer. See section disclosures, auditing of amount B situations will 904(h). suffer. 220 TAX NOTES INTERNATIONAL, JULY 13, 2020 For more Tax Notes® International content, please visit www.taxnotes.com.  COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. c. Alternative Pillar 1 Proposal understandably short on details, Bansal suggests Despite the relative optimism OECD officials that a fractional apportionment method could be 30 express, it is still unclear that any consensus will applied to in-scope activities of MNE groups to be reached. In late May the co-coordinators of the determine a tax base for each jurisdiction where Subcommittee on Tax Challenges Related to the local revenue is earned. The elimination of double Digitalization of the Economy, a part of the U.N. taxation would follow existing domestic law and Committee of Experts on International tax treaty provisions. Regarding nexus, he Cooperation in Tax, issued a paper that included suggests that there be no global threshold. Rather, 31 a note from Rajat Bansal, one of the 25 members there would be nexus in a jurisdiction for any of the Committee of Experts. Writing in his MNE that has local revenue at or above the individual capacity, Bansal questioned whether defined threshold for that jurisdiction. “the expected modest revenue impact” of the 3. Pillar 2 unified approach justifies what he terms “the a. Broader Economic Significance of the large-scale changes in the system of taxing Minimum Rate Chosen MNEs.” On pillar 1, he criticizes the separation of routine and nonroutine profits, saying the unified Since the 1980s, each time the United States approach “does not present either a robust has significantly reduced its corporate tax rate, methodology for separating the two, or there has been a worldwide trend toward lower theoretical foundation on which such distinction statutory rates. Although the effects of COVID-19 might rest, nor the data with which this might be on government revenue and the need for rigorously done.” He also notes regarding pillar increased government services may buck this 1’s scope a nontransparent policy rationale for the trend, recent years have seen many countries treatment of consumer-facing businesses, as well reduce their statutory corporate tax rates. For as overall complexity and difficulties. He singles example, the United States under the TCJA out the complexity of avoiding double taxation, as significantly reduced its rate to 21 percent while well as comments on the practicalities of dispute the United Kingdom reduced its corporate rate resolution. Noting that “any dispute between two below 20 percent, even referring to creating a jurisdictions over Amount A will likely affect the “Singapore on the Thames,” from a tax and taxation of Amount A in multiple jurisdictions,” regulatory competition perspective. he raises conc