Draft Model Rules on Tax Base Determination

We here publish the comments we submitted on the draft model rules for tax base determinations released by the OECD Secretariat on 18 February 2022 for public consultation, in the continuing work to address the tax challenges of the digitalised economy by the Task Force on the Digital Economy (TFDE) set up by the G20/OECD Inclusive Framework on BEPS.

While technical in nature, these rules have potentially far-reaching policy implications. Although the scope of application of these new rules is currently very small, limited to the 100 largest and most profitable multinational enterprises, they provide building blocks for new rules that could finally ensure taxation of multinational corporate groups in accordance with the economic reality that they operate as unitary enterprises. The tax base determination rules would establish an agreed approach for adjusting the consolidated accounts that MNE corporate groups already produce for financial accounting to make them suitable for tax reporting purposes.

Hence, it is important that they should be designed to enable the eventual more comprehensive global adoption of this new approach, and that there should be adequate public debate of the design of these new rules. Since the intention is to ensure adoption of these rules by a large number of countries with little or no further opportunity for modification, it is particularly important that these public consultations should be conducted in a way that facilitates wide participation before the rules are finalised.

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BEPS Monitoring GroupComment
Draft Model Rules on Nexus and Revenue Sourcing

We here publish the comments we submitted on the draft model rules on nexus and revenue sourcing, released by the OECD Secretariat for public consultation, in the continuing work to address the tax challenges of the digitalised economy by the Task Force on the Digital Economy (TFDE) set up by the G20/OECD Inclusive Framework on BEPS.

These detailed technical rules for identifying the source of sales would be used in determining which countries would be eligible for an allocation of taxing rights, in respect of around one hundred of the biggest and most profitable multinationals, over so-called Amount A, which is 25% of the ‘residual’ profits, defined as profit in excess of 10% of revenue.

18 February 2022

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BEPS Monitoring GroupComment
Comments on the Model Rules for the GloBE

The agreement that countries wishing to do so will introduce a global anti-base erosion tax (GloBE) was a historic breakthrough. Such concerted counter-measures could put a brake on the competition to reduce tax on the profits of multinational enterprises (MNEs), and perhaps even reverse it. They could also potentially assist a renewed attempt to rebalance the allocation of rights to tax MNE profits according to where they have real activities and value is created. Although the GloBE opens a new way forward, its direction and destination remain uncertain, and a longer-term solution will require continuing efforts on all sides.

In view of the importance of this initiative, we are publishing now our analysis of the Model Rules for the GloBE published on 20 December 2021, although neither the Commentary nor the Implementation Framework have yet been released. These rules are highly detailed and complex, and in our view it is both unrealistic and undesirable to expect any country simply to enact them verbatim in its domestic laws. The OECD cannot legislate for the world, nor is there a global tribunal that could resolve the many practical and interpretation issues they will inevitably raise.

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Action 1BEPS Monitoring GroupBEPS, global minimum taxComment
Comments of the G24 on the Proposed Two-Pillar Solution

At this critical moment in negotiations to reform international tax rules, the G24 lower-income countries have published their views on the proposals, which we consider state what is needed for an acceptable and durable agreement to be reached. Our analysis of the key components of a possible final package shows the importance of the points made by the G24, and why lower-income countries should not be pressurised into accepting rules that would damage them, and prevent any further progress towards more comprehensive and effective reforms.

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BEPS Monitoring GroupComment
A New Approach to Countering Harmful Corporate Tax Competition

We publish here a statement made to the FISC Subcommittee of the European Parliament made by Sol Picciotto. coordinator of the BMG. It outlines how a strong global corporate minimum tax could benefit almost all states, including all EU member states, by increasing corporate tax revenues and ending the beggar-thy-neighbour race to the bottom in corporate tax rates.

It urges all states, and the EU as a bloc, to support the proposals from the Biden administration for such a strong tax, at a minimum rate of at least 21%, which could be ensured by modifying the OECD proposed global anti-base-erosion tax (GLOBE), to allocate undertaxed profits fairly between states based on a formula reflecting each multinational’s real activities in each state, as outlined in our proposal for a minimum effective tax rate for multinationals (METR). A new paper on the METR includes economic impact assessments for countries, showing that almost all would benefit, losses would be limited to a few with average per capita GDP over $40,000.

Implementation by the EU should follow the dual approach proposed by the Commission in 2018, applying this formulaic minimum tax to non-EU countries while introducing within the EU a common consolidated corporate tax base (CCCTB).

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BEPS Monitoring GroupComment
Payments for Software under the UN Model Convention

We have submitted comments to the UN Tax Committee’s consultation on a discussion draft to revise the Royalties article to clarify its application to software. Unfortunately, in our view the draft is seriously defective, since it is based on and would perpetuate a confused and misleading understanding of copyright introduced in 1992 in the OECD Commentary. This interpretation was rejected by many states, many of which have chosen to clarify their actual treaties by including a specific mention of computer programs as examples of copyright work. This draft proposes a different approach which could have retroactive effects on these treaties and deprive many states of taxing rights. We urge the Committee to adopt instead a simple clarification of the model based on these existing treaties. To contribute to a rapid conclusion of this work we provide a draft for five paragraphs of Commentary to accomplish this task.

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BEPS Monitoring GroupComment
Meet the METR

We republish here an article written by several BMG members, together with other colleagues, first published in Tax Notes International on 15 February 2021.

The article explains and analyses our suggested revised version of the OECD’s proposed global anti-base erosion tax (the GLOBE), a minimum effective tax rate for multinationals (the METR). This presents in more detail the proposal first made in our comments of December 2019 on the Pillar Two proposals.

Our METR is a more equitable, far less complex, and more practical variant on the GLOBE, and could be introduced by a coalition of willing states.

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BEPS Monitoring GroupComment
Submission on the Pillar One and Pillar Two Blueprints

These blueprints are a testament to the commitment and efforts of many dedicated government and OECD officials, and provide many building blocks for potential solutions. Regrettably however, the proposals as a whole do not deliver on the mandate for the BEPS project to align taxation of multinational enterprises (MNEs) with where their activities occur and value is created.

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BEPS Monitoring GroupComment