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Minimum Tax Rules Give First Look Into World Under Global Pact

Nov. 26, 2021, 7:00 AM

The OECD is working on rules that will give companies a clearer idea of how nearly 140 countries may levy a 15% global minimum tax rate.

The rules—or model legislation—will serve as a guide for governments to implement the 15% rate domestically as part of a broader Oct. 8 deal to overhaul global tax rules. For tax advisers, the legislation could answer long-awaited questions on how exactly the 15% levy will hit tax bills and how to comply.

The two-part deal—brokered by the Organization for Economic Cooperation and Development—will reallocate a portion of the largest multinationals’ profits, known as Pillar One, and create the 15% rate, known as Pillar Two. Officials need to finalize technical details on both pillars—creating treaties, model legislation, and other tools countries will need to change domestic laws and join global agreements in the years ahead.

The Pillar Two legislation, which the OECD said in October would be ready by the end of this month, will be put to use almost immediately. The EU said it will release a directive in late December outlining how all member states should adopt the minimum tax rules.

“This is now, to me, the start of the next phase of the process and an implementation phase where we’re really looking for those much more detailed design elements from a tax technical perspective,” said Monika Loving, managing partner, international tax services at BDO in Atlanta.

Filling in Details

Companies are looking to the forthcoming Pillar Two model legislation to answer technical questions about how the rules work—to let them do a more detailed calculation of their effective tax rate in each jurisdiction to see whether and where the minimum tax will hit them, said Bart Le Blanc, a partner at Norton Rose Fulbright in Amsterdam.

The model rules are “the starting point for everybody to really do the analysis,” he said.

More details on the new rules and requirements will also give companies a clearer idea of what information they’ll need to gather to comply—which could call for internal changes.

“Companies will need to gather many additional data points and adapt internal processes and systems at an early stage, and certainly well in advance of the application of the rules,” said Marlies de Ruiter, global international tax policy leader at EY.

The U.S. already has a form of a minimum tax—known as GILTI—but for governments in the rest of the world this will be a new system, said Will Morris, deputy global tax policy leader at PwC.

“While the concept is easy enough to understand—you have a minimum tax, okay, we get that—you do it on a country-by-country basis, which obviously makes it more complicated,” he said. “It’s actually the mechanics of making it work which are crucial.”

One of the biggest questions the model rules may answer is how the new system will deal with timing differences—the difference between financial reporting and taxable income, or when a company reports something and when it pays tax on it.

Those details will help answer questions like how the rules will treat the amortization or depreciation of assets.

The model rules may clarify what system Pillar Two will use to deal with timing differences: deferred tax accounting, loss carryforwards, or something that combines elements from both approaches.

The model rules will focus on two elements of Pillar Two. The main piece of the plan, called the income inclusion rule or IIR, lets one country top up a company’s tax to the minimum rate when it isn’t paying enough in another jurisdiction. The undertaxed payments rule is meant as a backstop if the company’s parent country isn’t applying the IIR.

A third piece of the minimum tax deal, the subject-to-tax rule, is intended to let developing countries apply a minimum withholding rate under treaties. The OECD’s October implementation plan said a model treaty provision for the subject-to-tax rule would be developed by the end of November.

The OECD declined to comment.

Watching Washington

Pillar Two will have global ramifications, but many U.S.-headquartered companies are more immediately concerned with potential changes to the U.S.'s own global minimum tax, known as GILTI, part of the spending and tax package Democrats are currently trying to pass.

The proposed changes would increase the GILTI rate and apply the minimum tax country-by-country, instead of on a company’s globally blended tax rate. Both changes bring the U.S. rules much more closely in line with the OECD agreement.

“Nothing is guaranteed until they agree that GILTI is a compliant Pillar Two regime,” Morris said.

The OECD’s model rules aren’t likely to say much, if anything, about GILTI as long as the legislation is pending, practitioners said. But if the GILTI changes don’t go through, and the regime isn’t considered an acceptable substitute for the global minimum tax rules, U.S. companies could face two sets of minimum tax rules.

To contact the reporter on this story: Isabel Gottlieb in Washington at igottlieb@bloombergtax.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergindustry.com; Vandana Mathur at vmathur@bloombergtax.com