David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: pillars' progress.
We're checking in again on the OECD's two-pillar project to reform the taxation of multinational companies. Despite ongoing challenges, the inclusive framework on base erosion and profit shifting (BEPS) continues to make progress toward a final design for implementation.
In a minute, I'll be joined by Tax Notes chief correspondent Stephanie Soong to talk more about where things stand now and where we expect them to go.
Later in the episode, we'll hear from Tax Notes State author Naomita Yadav about her column, "Tax Matters of Life and Death."
But first, Stephanie, welcome back to the podcast.
Stephanie Soong: Hey, thanks for having me.
David D. Stewart: So before we really dive into things, could you give our audience a bit of a refresher on what the two pillars are?
Stephanie Soong: Yes. So the two pillars, this refers to a plan that the OECD brokered among 137 countries. It was meant to follow up on action 1 of the OECD base erosion and profit shifting project, which dealt with addressing the tax challenges of digital economy. So the two pillars was basically a overhaul of the international tax system. It does two separate things.
Pillar 1 would revise profit allocation and nexus rules to give market jurisdictions a new taxing rate, called amount A, over some portion of multinational corporate residual profits that are tied to sales in a market jurisdiction. That's where the consumers are located.
Pillar 1 also has amount B. And that provides a fixed return for baseline marketing and distribution activities in market jurisdictions in line with the arm's-length standard. And it also includes dispute resolution and prevention mechanisms for tax certainty for amount A and issues related to amount A.
So pillar 1 is widely seen as part of the plan that'll address the taxation of digital activity. It also requires countries to withdraw unilateral measures, like digital services taxes, that they may have adopted in the absence of a multilateral solution to tax digital activity and also prevents countries from introducing new measures, the new such measures.
So at the heart of pillar 2 are the GLOBE rules, the global anti-base erosion rules, which are the income inclusion rule or the IIR (income inclusion rule) and the UTPR, which is also known as the undertaxed payments or profits rule. And this is a system of top-up taxation to make sure that companies do pay a 15 percent no tax rate.
And pillar 2 also includes the subject-to-tax rule. That's a treaty-based rule under which source jurisdictions can impose a top up withholding tax on some related party payments that are taxed below a nominal rate of 9 percent.
And as I've talked about before on this podcast, nearly all of the 140 some members of the inclusive framework had agreed in 2021 that they would adopt these two pillars.
David D. Stewart: OK, so this project has been going on for quite some time now. I understand there's been some major changes since we last talked about it in July. Could you tell us what's been going on?
Stephanie Soong: Yes. So not so much major changes of the project itself, but for the team behind it. So everyone knows that Pascal Saint-Amans, he was a director of the OECD Center for Tax Policy Administration.
He unexpectedly announced in September that he would step down as the director of the CTPA (Centre for Tax Policy and Administration). At the end of October, he decided he would take a job elsewhere. And now, he's at the Brunswick Group, which is a global advisory firm. And now, Grace Perez-Navarro, who was formerly deputy director, is now the director of the CTPA. So that's kind of interesting.
Pascal had been in this role for over 10 years and was the one who really got the BEPS project and the BEPS 2.0 project going. So I'd asked him, "Why now?" Because it seems like a lot of people were asking him. "Why now? It sounds like you're going to jump, because it's sinking."
But he insisted that it was because he had been thinking about leaving for a while, but just hadn't had a chance. And now, that the pillars seemed to be pretty stable and the work is still going and he felt it was time to go and get fresh blood in.
So Grace Perez-Navarro will be director until March next year. And then she'll retire and it's still unclear who will take over as director after she leaves.
David D. Stewart: All right. So for getting into the details, why don't we start with pillar 2. As I mentioned, we talked about this back in July. So what have been the updates since then?
Stephanie Soong: So at the OECD, the Secretariat and Working Party 11 are continuing to work on what they call a GLOBE implementation framework. They hope to get that out by the end of the year. This framework includes things like safe harbors, administrative guidance, standardized return forms, things that MNEs (multinational enterprises), in scope, MNEs would need to comply with these rules once countries start adopting them. And the OECD is also trying to get out the subject-to-tax rule, I think by the end of the year as well, if I'm not mistaken.
Meanwhile, countries are starting to move toward implementation, but it feels like who's going to jump in the pool first, kind of. No one really has adopted a global minimum tax at all except for the U.S. and countries over varying stages of implementation, some have started consulting on implementing pillar 2 in their respective countries. Others have produced draft legislation.
The EU comes to mind as the first to have a draft directive on the table. And on November 17, the U.K. had their autumn statement. And they had been consulting on how to implement pillar 2 and the Chancellor of the Exchequer Jeremy Hunt announced that the U.K. was indeed going to implement pillar 2 rules starting with the GLOBE.
So he announced during the autumn statement that the U.K. would legislate for the income inclusion rule, the IIR, in the spring Finance Bill 2023. And also adopt a qualified domestic minimum tax, which countries are allowed to adopt. These minimum taxes would take effect before the income inclusion rule. So it's an optional measure that countries can adopt under the GLOBE model rules.
So the U.K. announced that it would also produce UTPR legislation. So the rule takes effect no later than the accounted period, beginning on or after December 31, 2024, which really means the UTPR would take effect in 2025.
So there is some stuff moving. I mean, there are countries moving. It's just a matter of who's going to go first.
David D. Stewart: So before this project even got started, the U.S. had implemented a sort of minimum tax in the global intangible low-taxed income rules. And since we last talked, the U.S. has adopted a second sort of minimum tax, the book minimum tax, in the corporate AMT (alternative minimum tax) as part of the Inflation Reduction Act. How does that factor into all of this discussion on pillar 2?
Stephanie Soong: I think a lot of the hope for the U.S. implementing pillar 2 rules really kind of rode on the reforms on GILTI. Because GILTI, the IIR was sort of inspired by GILTI and countries were hoping that the U.S. would be able to amend the GILTI so it's more in line with the IIR.
But because now we've got this corporate AMT in place, the question is how will it work with the IIR under the GLOBE framework? How are other countries going to treat it? Is it going to be what they call a qualified IIR in line with the rules? Is it going to be another CFC (controlled foreign corporation) regime?
Kim Clausing, I think recently said that, at a conference, she said that was probably, it could be a bridge toward eventual GLOBE IIR adoption for the U.S. but it's still really unclear what's going to happen now.
David D. Stewart: Going beyond the U.K. and U.S. potential implementation of this, what are we seeing in other countries? How are they approaching pillar 2?
Stephanie Soong: A lot of countries like Switzerland, Canada, Singapore, Jersey, they're all consulting on how their respective countries should adopt the GLOBE rules.
The only block of countries that has actually produced any kind of draft legislation that is complete is the EU. As you know, the EU produced a draft directive in December 2021 on the GLOBE rules. But they've had a lot of trouble getting unanimity on this directive, because as you know, the EU needs all member states to be on board with a tax directive. And Hungary, it's still a holdout.
And that has been a bit of a problem for the Commission and for the EU Council, because they really want to get pillar 2 and GLOBE off the ground. There are five EU countries, and including Germany, France, they said that they would go ahead anyway if Hungary continued to hold out and do an enhanced cooperation type of thing. Enhanced cooperation means that a group of member states can go ahead with a tax directive as long as a minimum of nine are on board. So we'll have to wait and see what happens with that.
Meanwhile, the U.S. actually announced recently that it would cancel its treaty with Hungary, citing Hungary's opposition to the GLOBE directive, the pillar 2 directive in the EU, and that has riled up some Republican lawmakers actually in the U.S. A bunch of Republican lawmakers actually sent a letter to Treasury saying that the U.S. should reverse its stance on canceling the treaty with Hungary.
Never mind the fact that the Hungary-U.S. Treaty, that is going to be canceled. It's going to be canceled anyway, because there is a pending new Hungary-U.S. treaty that has not been approved yet in the Senate.
So a lot of threads to unspool here, because pillar 2 is really the one pillar that has been ramping up in terms of action.
David D. Stewart: Well, speaking of action, what are we expecting next on pillar 2?
Stephanie Soong: I'm waiting for the OECD to release their implementation framework for the GLOBE rules as well as the STTR (subject-to-tax rule). And I am just waiting to see which other countries are going to be the first to pick a punch, really. We'll see what happens.
David D. Stewart: All right, well, then turning to pillar 1, what's been happening since we last talked about that?
Stephanie Soong: So pillar 1 isn't getting as much attention these days as pillar 2, just because pillar 1 seems to be more of a farfetched prospect in terms of implementation, which, I guess, is fair because a lot of the rules, even though countries have agreed to implement it, a lot of the rules have not been finalized yet. So the OECD has been in hard at work producing public consultation documents for draft amount A rules.
So in July, they produced a public consultation draft on amount A rules and held a public consultation meeting in September in Paris. And so then they produced another public consultation document on draft administration rules and tax certainty aspects of amount A and issues related to amount A. So that consultation just closed. And comment letters have been published. So I don't know when that consultation meeting will happen, but I would expect that to take place at some point.
Meanwhile, G-20 finance ministers and leaders continue to push ahead with pillar 1 and pillar 2. Recently, the G-20 leaders, they had a meeting in Bali. And in their declaration, they reaffirmed their commitment to both pillars and actually called on countries to sign on to the multilateral convention that's needed to implement the pillar 1 amount A rules when those rules are ready.
So the OECD is currently working on producing that multilateral convention. And they're hoping to get it ready for countries to sign by mid-2023. Meanwhile, we're also waiting for other, what they call a building block from amount A, including a document on unilateral measures. So this document is expected to discuss what kind of unilateral measures countries will be expected to withdraw once those amount A rules are in place.
David D. Stewart: Now, you alluded to this before, but pillar 1 does seem to be a much heavier lift than pillar 2. What can we expect if it fails?
Stephanie Soong: Well, we can expect lots of digital services taxes, probably. Digital services taxes are like the boogeyman in the room. All countries don't want digital services taxes, especially the U.S. Republicans and Democrats can agree on one thing and that's that digital services taxes are bad. And if pillar 1 fails, if Amount A fails, then I'd probably bet that those digital services taxes will be back in full force, because a lot of countries are fed up with seeing what they see as digital giants and companies with digital services really just escaping tax. So they're going to probably act on unilateral measures.
And that brings the question up about whether we'll see more trade disputes over digital services taxes. And already, we're seeing some action toward that direction, because the USTR, the [Office of the] U.S. Trade Representative, has been consulting on the Kenya trade deal and with the head of public consultation.
And some trade groups have been bringing up this idea again that as a condition of the new Kenya-U.S. trade treaty, or trade agreement, they should drop their digital services tax. So now, we're seeing trade and digital taxation creep back together and convene. So I would expect more trade tensions to restart if amount A fails.
Also, the U.K. Public Accounts Committee is supposed to hold a hearing on the U.K. DST (digital service tax) on December 8, just questioning HMRC (Her Majesty's Revenue and Customs) and Treasury about what the plan is for withdrawing these taxes if pillar 1, amount A comes into effect.
So, you know, digital services taxes for everybody.
David D. Stewart: Well, then stepping back for the bigger picture, is there any sense of when this entire project is going to be finished?
Stephanie Soong: This is a very good question. I would guess that this will never end, which is good for me, because I can write about it all day long. Seriously, I think that there is really no— I think there's— I don't know if there is an end in the project.
I mean, I guess, in the near future, the dates I can see maybe for the major parts of the project to be finished is 2024, 2025 maybe. But I think that it's going to be an ongoing process. I don't know if there's going to be a real end date in sight, unless the G-20 decides that they want to scrap everything. I don't think it's going to happen. But I think it'll be with us for a long time to come.
David D. Stewart: Well, that's great, because I love having you on the podcast. And so we're going to get to keep doing that for the foreseeable future. Stephanie, thank you for being here.
Stephanie Soong: Oh, thanks for having me.
David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?
Paige Jones: Thanks, Dave. In Tax Notes Federal, Bora Bozkurt and Michael Bauer examined the taxation of bridge convertibles. Marty Sullivan examines the growing budget deficit and how inflation could serve as a deficit reduction mechanism, albeit a dangerous and temporary one.
In Tax Notes State, Billy Hamilton examines the results of notable tax measures on the state ballots in November. Justin Atwood and Brooks Poole examine the effects of different state income tax laws on NFL players' contract negotiations.
In Tax Notes International, Mindy Herzfeld explains that FTX's bankruptcy filing raises questions about the need for tax regulation in the crypto industry. Wolfram Richter and Stefan Weber proposed a better approach to the amount A double taxation problem.
In Featured Analysis, Roxanne Bland examines market-based sourcing and where and how to determine the right market.
On the Opinions page, Joe Thorndike explains why the U.S. debt limit should be abolished.
And now, for a closer look at what's new and noteworthy in our magazines, here is Tax Notes State Editor in Chief Jéanne Rauch-Zender.
Jéanne Rauch-Zender: Thank you, Paige. I'm here with Naomita Yadav, a partner at Withers in San Francisco. Welcome to the podcast, Naomita.
Naomita Yadav: Thank you very much, Jéanne.
Jéanne Rauch-Zender: Let's chat about your Tax Notes State column, "Tax Matters of Life and Death," and your most recent article, "To PTE or Not to PTE: Estate Planning and SALT PTE Elections," which you co-authored with Mark Mullin of Shartsis Friese. What factors should come into play when deciding whether to PTE?
Naomita Yadav: Well, it is always a philosophical question, but beyond the philosophy of it, I think that there are a couple of different things.
First and foremost, there have been numerous other articles that have been written on the broader income tax implications of a PTE election. What we were trying to focus on was more about the estate tax, which has not really been thought about as comprehensively. I think people have had passing thoughts of, "but wait, what if the PTE is owned by different types of trusts that were set up using estate planning techniques to do wealth transfer?"
And that is what we were really trying to think about more in depth, to say, "Well actually, if you just do a PTE election..." And a lot of your family limited partnerships-type entities or family LLCs, whichever ones, tend to have quite basic type of partnership provisions. They're not providing for things like special allocations or any type of mechanisms by which you can actually preserve the reason why you put the PTE under your grant or trust, which was to actually keep the grantor paying the income tax. So doing this is actually undercutting that.
So I think the factors are numerous. You have to take the overall income tax savings, which is somewhat more of a complex decision than just, "oh, if the entity pays tax, it is just, per se, a win." Sometimes when I've spoken to various accountants, they have told me that when they actually run the numbers, they find that this tax savings might not be as big as they might have originally thought or the client might have thought. So I think as always, having a comprehensive grasp of this is what the true tax benefit is, and then offsetting that by, "OK, well what is the cost on, say, the estate tax side?" and then coming up with a solution, which can actually thread the needle.
Jéanne Rauch-Zender: Absolutely. And I appreciate you highlighting the several factors and the unique perspective this article brings to the conversation. And you are right, this certainly is not the most common discussion when we talk about PTEs. That's why I think it's so valuable.
Now, I was thrilled to launch your column, "Tax Matters of Life and Death," in July. How did you choose your column name?
Naomita Yadav: Well, isn't tax always about life and death?
Jéanne Rauch-Zender: Yes.
Naomita Yadav: How many clients.... No, I think so. I work with families, individuals to do both estate tax and income tax planning. So to me, it is a matter of death. An estate tax wouldn't really, let's face it, it wouldn't really matter if people didn't die. So it is a matter of death, but also of life.
And I think that some of the things that I've talked about in various articles, like the PTE article, as well as the exodus from California, all try to take into account this wait approach. At the end of the day, it is about optimizing. So it is a tax matter of life and death. You're trying to optimize between various types of taxes. You don't want to yank on one level too hard without actually thinking through these other aspects that'll also affect the individual's taxes.
Jéanne Rauch-Zender: Absolutely. This is why I am so thrilled to have you join me and this new column. Now, would you care to share hints on what's to come in your next article?
Naomita Yadav: So as you know, I always have five different things that I always want to talk about. But I think one of the things that I've been thinking more interestingly about, as you know, I work and my practice is based in California for the most part. But California is a very interesting area, in the Bay Area especially, because you do have people who are, a good chunk of the folks here may have cross-border issues. They may not be U.S. citizens. Or they might have family that is not U.S. citizens.
So even when you're looking at a state matter, you are actually overlapping different and very interesting tax concepts, because it can have a multitude of effects. And fascinatingly, California doesn't necessarily actually follow the U.S. tax treaties. So even if you have certain tax benefits that might apply on a treaty with the country, the state can still go ahead and do its own taxation.
And to me, that is just like, it's almost like its own microcosm. So you are actually dealing with federal tax and cross-border. And it is a good chunk of my practice.
But I think one of the recent developments that might bring light to this is when you have celebrities moving to California, for example, certain ex-members of the U.K. royal family, what are the implications there? How can one think through all of these myriad of crossing over taxes?
Jéanne Rauch-Zender: Thank you so much for joining me today, Naomita. It's always a pleasure to catch up. Before I let you go, where can listeners find you online?
Naomita Yadav: Oh, thanks. I mean, it is always a pleasure to chat with you about tax and all other things of life and death. But online, other than of course, the Tax Notes publications, which the archives are always available, my firm, Withers, also puts up our articles. And we also put them out on LinkedIn. I usually like to put a little link of the article in my own LinkedIn profile. So that is also available that way. And the firm's LinkedIn, of course.
Jéanne Rauch-Zender: Excellent. You can find Naomita's article online at taxnotes.com. And be sure to subscribe to our YouTube channel, Tax Notes, for more in-depth discussions on what's new and noteworthy. Again, that's Tax Notes with an S. Back to you, Dave.
David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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