By Toby Eggleston, Nick Heggart, Ryan Leslie and Graeme Cooper
The clock is ticking on enacting the BEPS 2.0 measures, aimed at re-fashioning the international tax order. Treasury has finally begun the consultation process on how Australia should go about implementing the measures, and the OECD has just released a progress report and another 200-page consultation paper.
Dissatisfaction with the results of the first BEPS project in 2015 led many countries, including Australia, to enact a variety of unilateral measures to address perceived abuses and shortcomings in the international tax system unresolved by BEPS 1.0. It did not take long for other countries to start complaining, which in turn led the OECD and its Inclusive Framework to start a new project aimed at trying to bring about a degree of coherence and co-ordination.
The protracted debates around re-fashioning the international tax regime culminated in an agreement, to which Australia was a party, concluded in 2021 to implement a so-called “two-pillar approach:”
- Pillar 1 – a proposal to give greater taxing rights over a share of the profits of the largest multinational enterprises to the countries where their customers are located (a proposal which walks away from doctrines such as the permanent establishment threshold, the treatment of subsidiaries as separate entities, and arm’s length pricing), and
- Pillar 2 – a proposal to ensure large multinational enterprises pay tax at a rate of at least 15% of adjusted book profits (a proposal which chips away at choices by countries to choose their own taxes, set their own tax rates and define their own tax base).
Earlier this month, Treasury released a Consultation Paper seeking submissions on how the new regimes should be implemented in domestic law, how they should interact with existing domestic law and ways to minimise compliance costs.
The Paper is curious:
- it poses some big picture questions (“What are your views on the challenges facing the international tax system …?”) but this question is largely irrelevant given what we have agreed;
- it asks some imponderable questions (“Do you envision Pillars One and Two incentivising any behavioural changes and/or business restructures over the medium to long term …”);
- it asks some questions which seem unnecessary, given where we are (“Do you agree the two-pillar multilateral solution will help make the international tax system fairer …?);
- it asks questions to which Treasury should already know the answer (“Do you agree with the assumption that no Australian headquartered multinational will be in the scope of Amount A, given the current proposed thresholds and exclusions …”); and
- it asks questions that are simply premature (“What changes … to processes or systems … do you anticipate that businesses may be required to make in order to comply with Pillar Two”).
One new and significant aspect of the Paper is the amount of attention devoted to the possibility of Australia enacting a Domestic Minimum Tax as a way of collecting for Australia tax that might otherwise be paid to the country where the headquarters of an (under-taxed) Australian subsidiary is located. This is the first prominent airing by Treasury of a proposal which emerged fairly late in the BEPS discussions: the possibility that a source country could switch off the effects of another country’s Pillar 2 legislation on its local subsidiaries by enacting a US-style minimum tax. It seems we are being prepared for the introduction of an Australian alternate minimum corporate tax.
The Paper suggests Treasury is also interested in hearing about the bigger picture, claiming that submissions “will also help with various ongoing negotiations on design elements,” but it seems improbable that there is much scope to influence the negotiations of the Inclusive Framework.
Meanwhile, the OECD has just released a progress report and a consultation paper on the administrative aspects of one component of Pillar One (so-called “Amount A” – the amount of profit allocated to market jurisdictions). It contains a summary of the current approaches to the administrative and compliance aspects, and some model rules.
It sets out two options for the reporting requirements to be imposed on groups to report and pay tax in market jurisdictions, and to claim tax offsets in other jurisdictions for amounts taxed offshore. However, it is clear from the paper that there is still disagreement on key issues about Pillar One:
Discussions within the Inclusive Framework are continuing regarding the process of identifying the taxpayer/s in market jurisdictions and relief entities in relieving jurisdictions …
and so the document forges ahead with the both of the main contenders:
the Model Rules for the Administration Framework for Amount A have been drafted to accommodate both approaches [and] the Model Rules will be adjusted accordingly once a decision has been made.
Consequently, “the [Model] rules and procedures contained in this report do not reflect the final agreement of the Inclusive Framework.”
The Paper also describes a unique and complex process for handling disputes about Pillar One. The Paper takes the position that trying to solve the disputes that Pillar One will cause by traditional methods “… would be unimaginably complex…”, and so it proposes submitting disputes at first instance to special panels of tax administrators from affected countries in the hope that they will negotiate a solution. If the tax administrators are unable to agree, the matter is then referred for binding arbitration by a second panel possibly comprised of a combination of independent experts and government officials. The dispute settlement processes are complex – the paper needs 150 pages to explain the proposals and tentative rules.
The Treasury Paper is open for consultation for 4 weeks – submissions are due on 1 November – which suggests a somewhat perfunctory consultation process for such a big project. The OECD paper is open for consultation until 11 November.
The size and complexity of the “two pillar” project, as well as the room for errors, miscalculation and over-reach, should not be under-estimated. And the problems are exacerbated by the fact that, as the OECD paper reminds us, key policy decisions are still in flux.
Pillar One will require –
- a multilateral convention and “model rules to assist countries with activating the Multilateral Convention into domestic law” to be prepared by the OECD; and
- changes to domestic law to assert the claim to payment of Pillar One tax, give credits for Pillar One tax paid offshore and, possibly, repeal Australia’s MAAL and DPT (though we understand Treasury is resisting the argument that these rules are the kind of “other relevant similar [unilateral] measures” which must be repealed as part of the price for Pillar One). Two other public consultation documents will be released by the end of 2022: one dealing with the withdrawal of Digital Services Taxes and similar measures, and the other one dealing with Amount B in Pillar One, with the hope of finalising all work “in the first half of 2023.”
Pillar Two will require –
- model rules and draft administrative guidance setting out the design of Pillar Two, a multilateral convention to modify existing tax treaties to allow one component of Pillar Two (the “Subject to Tax Rule”) to operate, and possibly another multilateral convention to bind countries to enacting a harmonised version of another component of Pillar Two (the “Income Inclusion Rule” and “Under-taxed Payment Rule”), all to be prepared by the OECD; and
- changes to domestic law to include in the income of Australian entities some of the undertaxed profits of their offshore subsidiaries, changes to domestic law to deny deductions to the Australian subsidiaries in foreign groups if the group has undertaxed subsidiaries offshore, and perhaps the creation of a domestic minimum corporate tax.
The original timetable suggested the new regime would start in 2023, and apparently some countries are still considering whether they can stay with 2023 for some or all of the package. But a revised timetable now suggests the legal instruments needed for the package are to be drafted and passed during 2023, ready for the system to start in 2024. It remains to be seen whether the deferred timetable can be met.