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OECD Releases Report on One Aspect of Global Corporate Tax Changes, in Effort to Ease Confusion

S.J. Steinhardt
Published Date:
Feb 26, 2024


Authorities in countries that have signed on to the international agreement on setting global taxes are trying to lessen the confusion that it has caused among companies in their jurisdictions, Accounting Today reported.

On Monday, the Organization for Economic Cooperation and Development (OECD) released a report on Amount B of Pillar One, which “provides for a simplified and streamlined approach to the application of the arm’s length principle to in-country baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries.” The report is in response to a request from the African Tax Administration Forum, and content from the report has now been incorporated into the OECD Transfer Pricing Guidelines.

According to the Tax Foundation's glossary, "OECD Pillar One would expand a country’s authority to tax profits from companies that make sales into their country but don’t have a physical location there."

According to an OECD document titled "Pillar One Amount B in a Nutshell," "Amount B is a critical component of Pillar One. While the work on Amount A updates the international taxation framework with respect to large and very profitable multinational enterprises (MNE), Amount B simplifies the existing transfer pricing rules for all taxpayers. It is focused on the application of transfer pricing rules to so called baseline marketing and distribution activities, likely the most frequent fact pattern that MNEs encounter in the jurisdictions where they operate."

Pillar Two, the 2021 agreement to establish the imposition of a 15 percent minimum tax on large companies in each country where they operate, has not been ratified by the U.S. Congress, but the Treasury Department has been working with the OECD on ways to make the tax regimes work.

The only change that the U.S. Department of the Treasury committed to pursue and get through Congress was changing the GILTI [Global Intangible Low-Taxed Income regime] to apply on a country-by-country basis, rather than on a global blending basis as it exists today, said Jose Murillo, a partner and national tax department co-leader at Ernst & Young, in an interview with Accounting Today. Murillo also  recently served as deputy assistant Treasury secretary for international tax affairs at Treasury and previously led EY's international tax and transaction services group based in Washington, 

"That's the only commitment we made, so when people talk about, 'When is the U.S. going to adopt Pillar Two?' that's too broad a statement," he said. "The only agreement was GILTI country by country. Is it going to be different than anyone else's income inclusion rule? That is probably the most we could get done and it's close enough. There are differences, but they're close enough, they're comparable and doing that would make GILTI Pillar Two compliant. Thereafter, everything else that is part of Pillar Two is optional, as it is for any other jurisdiction."

Murrillo told Accounting Today that he did not believe that the United States would need to adopt the OECD's undertaxed profits rule if it made the GILTI regime apply on a country-by-country basis. 

EY recently released a survey indicating that tax professionals expect the Pillar Two rules to have an impact on their transfer pricing strategies.

"Pillar Two makes transfer pricing more important because the location of the profits, where they're earned, where they're booked, is probably more important, because in a global tax regime where each jurisdiction is separate on an ETR [effective tax rate] basis, and you don't get credit for paying more tax in one country against lower-taxed income in another jurisdiction, finding that right balance, where you're close enough to 15 percent everywhere, but nowhere really above it is really important," Murillo said. "And that is where transfer pricing comes in. That means the stakes are much higher because there's going to be more focus on it."

He noted that Pillar One has a huge transfer pricing element to it, as well.

Companies will need to try out different scenarios to see where the impacts will be from the OECD tax changes, he said, but tax won't be the only impact. "It's not all in tax. It's in controllership, it's in audit, it's in financial accounting more broadly. What systems are required? How many more people do I need? Can I do this just with additional technology? And then just getting the processes in place because the rules are being implemented and they're taking effect in many jurisdictions this year in 2024.”

U.S. companies will face pressure in complying with such taxes in other countries, whether or not they're passed in Congress, but Murrillo noted that the United States is not the only country that is not in full agreement.

"We get the question sometimes of why would a country not adopt Pillar Two," said Murillo. "Some have announced they're not doing it or they're adopting a corporate tax, but it looks very different. I think it just depends on the profile of the jurisdiction.”

“I don't think everyone is going to go all in,” he added. “You'll see differences. But the big countries, the countries that are really driving this project, they will go all in."

Companies have called for greater certainty and uniform implementation, application and administration, and that will come down to the regulations, which could differ from country to country, he said. 

"That could prove challenging, because many countries have adopted Pillar Two legislation, but they'll need implementing regulations," said Murillo. “Then you can see changes continuing to be released from the OECD: additional administrative guidance, things that are described as clarifications or changes. How all that is incorporated in a country's domestic legislation is going to be interesting. That could just add to the controversy and uncertainty and the complexity of this whole system."

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