In ancient Rome, a college of “augurs” would predict the future by observing the flight patterns of birds, examining the entrails of animal sacrifices, or interpreting natural phenomena. While perhaps less colorful, our method of divination will hopefully be a little more precise. To develop this blog post, we have consulted our own augurs and have summarized all our predictions for transfer pricing developments in the coming year.
Continue Reading Looking Forward: Predictions for 2022
Pillar Two, which ensures that an MNE’s in-scope income will be subject to a minimum tax rate of 15%, is ready to go. On December 2, the Model Rules were agreed upon within the OECD Inclusive Framework and the EU is willing to speed up Pillar Two implementation. The formal endorsement by the Inclusive Framework (IF) and release of the Model Rules to the public are expected next week. A week later, on December 22, the draft EU Directive should be available and a EU Council discussion is already planned during the first week of January 2022. With respect to the primary rule of Pillar Two, the Income Inclusion Rule (IIR), the contemplated EU directive would apply when an Ultimate Parent entity (UPE), an Intermediate Parent Entity (IPE) or a Partially Owned Parent Entity (POPE) is located in a EU Member State.
Continue Reading OECD Pillar Two: The EU Implementation on Its (Express) Way
On October 13, 2021, the G20 Finance Ministers and Central Bank Governors issued a Communiqué formally endorsing the political agreement reached by 136 countries of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) on a two-pillar framework to dramatically change the taxation of multinational enterprises (MNEs). The Communiqué calls on the IF
On August 5, 2021, the OECD released updated Peer Review Results for preferential tax regimes reviewed by the OECD Forum on Harmful Tax Practices (“FHTP”) in connection with BEPS Action 5. Of particular interest to Multinational Enterprises (“MNEs”), the Peer Review Results report that the Foreign-Derived Intangible Income (“FDII”) regime is already “in the process of being eliminated” and that “the United States has committed to abolish this regime.”
The possibility that FDII might be repealed should come as no surprise given the Biden Administration’s Green Book proposal to eliminate FDII. And in any event, the repeal cannot actually take effect until and unless FDII is repealed by legislation. Nevertheless, for MNEs that would be adversely affected by the possible repeal, the references in the Peer Review Results send a strong signal that FDII repeal may be a key priority in future tax reform negotiations.
Continue Reading Whither FDII — OECD Discusses FDII in Harmful Tax Practices Update
On April 15, 2020, OECD released the report titled “Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience” (the “COVID-19 Response”). The COVID-19 Response discussed the decisive action many governments have taken to contain and mitigate the spread of the virus and to limit the adverse impacts on their citizens
On July 10, 2021, the G20 endorsed a broad framework to advance Pillars One and Two, which includes an aggressive timetable for bringing the new rules into force in 2023. The endorsement came in a Communiqué, which approved the July 1 statement by the 139-country Inclusive Framework. The G20 agreement represents a political consensus on
For over a decade, countries have been looking for ways to tax the digital economy. On July 1, 130 countries announced an agreement that would provide a new taxing right to enable a country to tax a portion of digital profits even in the absence of traditional taxable nexus with the country. This new taxing right is known as “Amount A”. The quantum of Amount A remained a mystery until the publication of the OECD’s “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy” on July 1, 2021 (the “Statement”) which quantified Amount A to be “between 20-30% of residual profit defined as profit in excess of 10% of revenue” for in-scope enterprises. Although this quantum of Amount A represents a political compromise, a solid theoretical basis underlying that compromise is essential to sustaining consensus.
The early proposals to modify profit allocation and nexus rules for the digital economy enterprises, which ultimately produced Amount A, strived to be based on certain subjective criteria, including the concepts of user participation, marketing intangibles and/or the concept of significant economic presence. The contemplated methods for profit allocation were the Modified Residual Profit Split method, Fractional Apportionment method, and Distribution-based approaches, along with the options for business line and regional segmentation. However, the criteria and methods of the early proposals are nowhere to be found to found in the OECD July 2021 Statement, leaving many questions about Amount A still unanswered. While the final compromise on Pillar One eliminates the focus on digital economy and shifts instead to high profitability when defining in-scope MNEs, the “digital essence” still surrounds Amount A. For one thing, the introduction to the Statement continues to refer to the “two-pillar solution to address the tax challenges arising from the digitalisation of the economy.” Moreover, a widely accepted assumption in the final Pillar One negotiations is that high profits are generated by intangibles and those are increasingly concentrated with digital businesses. Therefore, an analysis of Amount A cannot be divorced from the analysis of the factors that contribute to the digital economy.
On June 5, 2021, the Finance Ministers and Central Bank Governors of the G7 countries issued a Communiqué announcing their agreement on the conceptual framework for a substantial revision to global tax policy (the “Communiqué”). The Communiqué puts the G7’s stamp of approval on recent efforts by the OECD (supported by a big push by
As discussed in prior blog posts, Amount A will apply as an overlay to the existing profit allocation rules. As the profit of an MNE group is already allocated under the existing profit allocation rules, a mechanism to reconcile the new taxing right (calculated at the level of a group or segment) and the existing profit allocation rules (calculated at an entity basis) is necessary to prevent double taxation. This is the purpose of the mechanism to eliminate double taxation from Amount A. To reconcile the two profit allocation systems, it identifies which entity or entities within an MNE group bears the Amount A tax liability, which effectively determines which jurisdiction or jurisdictions need to relieve the double taxation arising from Amount A. This mechanism is based on two components: (i) the identification of the paying entity or entities within an MNE group or segment; and (ii) the methods to eliminate double taxation.
Continue Reading OECD’s Pillar One Blueprint: Elimination of Double Taxation
In February 2021, the Organisation for Economic Co-operation and Development (“OECD”) issued a handbook linked with the official roll-out of its International Compliance Assurance Programme (“ICAP”). ICAP was first introduced as a pilot in January 2018 (“ICAP 1.0”) as a voluntary program where MNE groups may receive “comfort and assurance” from multiple tax administrations as to the veracity of the MNE group’s transfer pricing allocations and numerous types of international transactions. While some notable countries did not participate in ICAP 1.0 (for example, Germany), the pilot program received positive reviews by a number of MNE groups. In March 2020, the OECD enhanced the pilot program (“ICAP 2.0”) to encourage more countries to join. On March 22, 2021, the OECD announced an initial list of twenty countries that are participating in the official program.[1]
Continue Reading ICAP, a New Tool in the Multiverse of Multinational Tax Dispute Management