10/01/22

INTERNATIONAL TAX: OECD told minimum tax rules are too complex.

As published on royalgazette.com, Monday 10 January, 2022.

The OECD’s effort to push through the controversial global minimum tax model rules may come to an abrupt halt, after the world body received a warning that the rules are not expected to work as intended.

The OECD (Organisation of Economic Co-operation and Development) has been told the rules are too complex even for the most sophisticated countries.

Surprisingly, the warning has come from within the OECD – its main business advisory group, Business at OECD (BIAC), which has urgently written to the executive, and the chairs and members of Working Party 11 on Aggressive Tax Avoidance (WP11).

Together with the Tax Committee, they say they have identified two major policy issues which may mean the Model Rules are unable achieve their intended purpose.

BIAC said that apart from policy inconsistencies and a technical issue they argue as being potentially fatal to the operation of the Model Rules, it “does not mean that we have not identified other technical or policy issues that we believe will need addressing in either the commentary or the implementation framework, if the rules are to operate smoothly and fairly, avoid double taxation, and not adversely affect cross border trade and investment.”

The group further advised there should be an expectation that there will be ongoing issues raised on a rolling basis.

The letter states: “We fear that the Model Rules may prove such an administrative and compliance struggle for many tax authorities (even some of the largest and best resourced given the proposed time frames) as well as for taxpayers, given less than 12 months to implement as yet unwritten, detailed laws, that 2023 (and possibly 2024) could be years of significantly increased uncertainty and instability.”

In October, 136 OECD countries provisionally agreed to change how multinational enterprises are taxed.

Just before Christmas, the OECD’s first raft of proposed mandates included Model Rules for Pillar Two’s effective global minimum tax rate of 15 per cent on “excess profits” of international conglomerates with revenues of at least $850 million a year.

The idea was to have wording that countries could simply work into their own laws to take effect in January next year.

But that could be a problem in the United States and many believe that without the support of such a large and dominant economy, the whole agreement may fall apart.

It was US President Joe Biden who put the deal on the table, breathing new life into earlier European plans, which had gone nowhere under previous US administrations.

The Financial Times last week observed that getting countries to agree to this reallocation of tax rights, known as Pillar One of the deal, requires a series of simultaneous changes to global tax laws, which is challenging.

Getting US congressional agreement, some believe, is remote and that could be a problem for the entire agreement.

Ireland and Cyprus have already announced increases in their corporate tax rate from 12.5 to 15 per cent. The EU has published a directive with its 27 member states now needing to introduce legislation to enact it.

Legal and academic observers have already said that corporate attempts at acquiescence will be burdensome financially for the affected companies and will also add significantly to their compliance requirements.

Meanwhile, a legal opinion published by Bloomberg Taxposits that an issue needing clarification is whether the Model Rules will apply to private investment structures that yield at least $850 million of annual investment income, such as a five per cent return on $17 billion of invested assets.

Squire Patton Boggs (US) LLP partner Jeff VanderWolk wrote: “The Model Rules contain carve-outs for non-profits, government entities, pension funds, and regulated investment funds and real estate investment vehicles that are owned by a number of unrelated investors, but there does not appear to be a carve-out for other types of private investment structures, eg. a trust or foundation for the benefit of a family that holds its investments in special-purpose entities.

“This issue was addressed under the country-by-country reporting rules on the basis that such structures are not considered MNE groups with 750 million euros of income because applicable accounting rules, do not require consolidation of the income of investment entities.

“The Model Rules, in contrast, arguably require a deemed consolidation of the income of all group members – other than those explicitly carved out – in the case of an Ultimate Parent Entity that does not prepare consolidated group financial statements.”