Tax Notes Talk

Implementation Issues: An OECD Tax Reform Project Update

July 22, 2022 Tax Notes
Tax Notes Talk
Implementation Issues: An OECD Tax Reform Project Update
Show Notes Transcript

Tax Notes chief correspondent Stephanie Soong Johnston recaps the agreement on the OECD’s two-pillar corporate tax reform plan and discusses recent roadblocks to full implementation.

Listen to more podcast episodes on the OECD's tax reform plan:

For additional coverage, read these articles in Tax Notes:

In our “In the Pages” segment, Heydon Wardell-Burrus, a researcher at the Oxford Centre for Business Taxation, chats about his Tax Notes piece, “Can Pillar 2 Be Leveraged to Save Pillar 1?

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Host: David D. Stewart
Executive Producers: Jasper B. Smith, Paige Jones
Showrunner and Audio Engineer: Jordan Parrish
Guest Relations: Alexis Hart

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: pillars in peril.

As the OECD seeks to finalize work on a two-pillar solution for taxing the digital economy, the project is facing some serious headwinds. With opposition asserting itself on both sides of the Atlantic, where do things stand now and how close are we to a final agreement? Tax Notes chief correspondent Stephanie Soong Johnston will talk about that in just a minute.

Later in the episode, we'll hear from Tax Notes International author Heydon Wardell-Burrus about his article which lays out a pillar 1 design proposal that leverages pillar 2.

But first, Stephanie, welcome back to the podcast.

Stephanie Soong Johnston: Thanks for having me again.

David D. Stewart: First, could you give listeners a brief overview of the OECD project?

Stephanie Soong Johnston: Ah, this is always a challenge because it's never brief, but I will try.

You may have remembered me talking about this project. This two-pillar project, it's an outcrop of the action 1 report from the OECD BEPS (base erosion and profit shifting) project in 2015 and pillar 1 provides for the formulaic reallocation of a portion of residual profits that the very largest multinational enterprises make in jurisdictions where they have consumers. And then those market jurisdictions would be able to have a taxing right that they call "amount A," over these residual profits.

Amount A requires a multi-level convention for implementation, which will also formalize a country's commitments to withdraw any unilateral digital services taxes and what they call relevant similar measures. They promise to withdraw those measures and refrain from introducing new ones in the future.

Pillar 1 also includes amount B which represents a fixed return for baseline marketing and distribution activities in market jurisdictions that are in line with the arm's-length standard. And the plan also includes dispute prevention and resolution mechanisms to enhance tech certainty.

Pillar 2 sounds a lot simpler, but is actually not. It ensures that large MNEs (multinational enterprises) pay an effective minimum tax rate of 15 percent in the countries in which they operate. This is primarily done through top-up taxation regime called the global anti-base erosion regime, or GloBE rules as everyone likes to call them.

Pillar 2 also includes the GloBE implementation framework and the subject-to-tax rule, both of which are still under development. The subject-to-tax rule is a treaty-based rule under which source jurisdictions can impose a top-up withholding tax on some related party payments that are tax below a rate of nine percent.

That's it in a nutshell.

David D. Stewart: OK. Well, I'll go on record as saying I don't like calling it the GloBE proposal, but that's fine.

Stephanie Soong Johnston: Better the GloBE than GloBEE. Which I've heard too.

David D. Stewart: Yes. Agreed.

So you alluded to the fact that we've been talking about this for a while, where do things stand now on the development of rules to implement these pillars?

Stephanie Soong Johnston: OK. So for pillar 1, amount A, the status on that is that the task force of the digital economy, which has been leading all of this work since it began many years ago, the task force is supposed to develop amount A model rules and commentary and a multi-lateral convention and explanatory statement to implement this amount A taxing right.

And to get there, the OECD has been holding what they call a series of "rolling consultations" on the various elements of amount A, such as: scope, revenue, sourcing, and nexus rules, tax-based determination.

They also consulted on the nature of the carve-outs that they provided. This includes the extractive and regulated financial services industries.

And just recently the OECD, they published what they call an "amount A progress report," which is just essentially a summary report of all the work done so far. And it also includes some new elements that have not been consulted on yet such as double taxation relief and what they call the "marketing and distribution profit safe harbor."

So this document just came out and public consultation is going until August. It sort of gives all stakeholders a sense of what amount A is going to look like, because a big complaint that taxpayers had was that, "Well, we can't really see how these rules are going to fit together because we're consulting on all these separate parts of amount A, so we need to see everything in one go to see how things are fitting together." So this is sort of that attempt to give stakeholders that chance to review amount A in its entirety, almost entirety.

Still work to be done. I assume they're going to do another consultation of this kind after they've finished up this one. So we'll see, I guess we'll have to stay tuned for that.

For pillar 2, the OECD published model rules in December of 2021 and accompanying commentary kind of explaining those rules and giving more guidance, that happened in March of this year. And we are now just waiting for the implementation framework and the subject-to-tax rule multilateral convention or multilateral instrument to implement that. So pillar 2 is further along than pillar 1.

Pillar 1 has been delayed. Initially the OECD and the inclusive framework had hoped to get a multilateral convention for amount A to be open for signature by the middle of this year, but that's definitely not happening. So the OECD secretary-general [Mathias Cormann] recently told the G-20 finance ministers that, "We're going to have to wait." Work is ongoing and we're now looking at a mid-2023 timeline for getting that multilateral convention ready for signature.

So, yeah, that's where we stand.

David D. Stewart: So there recently was a meeting of the G-20 finance ministers. What came out of that?

Stephanie Soong Johnston: So at these meetings, we usually expect what they call "communiqué" where all the G-20 finance ministers agree on wording. But this time they came out with a chair statement, which is interesting. I suspect it has something to do with Russia being part of the G-20 and maybe not everyone's on the same page on issues.

So the G-20's chair summary just had a small paragraph about tax. A reaffirming of the group's commitment to swiftly implementing the two-pillar solution. And it was very forward looking and to me, when I read it, didn't seem like they were going to let up. They were not discouraged by any of the hurdles that are in the way of implementing pillar 1 and pillar 2.

They called the inclusive framework to finalize pillar 1, including by signing the multilateral convention in the first half of 2023. Also they called the inclusive framework to conclude negotiations, to develop the multilateral instrument for the subject-to-tax rule under pillar 2.

The G-20 also had a tax symposium, which they usually do. And the main theme at that tax symposium was that developing countries really need a lot of help in implementing and administering pillar 1 and pillar 2.

So to me the chair summary was optimistic and still full steam ahead, but you can kind of see that there are some difficulties ahead. But the work still keeps going.

David D. Stewart: Well, let's talk about those difficulties, because there's been a fair amount of drama. We'll start with the EU. Could you tell us about what is happening there?

Stephanie Soong Johnston: So pretty much everyone considers the EU the first mover on implementing pillar 2 because after the OECD published the model rules in December 2021, the European Commission published a draft directive for the adoption of the GloBE rules in the EU.

But as you alluded to, there has been a lot of drama surrounding this EU-wide adoption of pillar 2, because the EU requires unanimity among all EU member states to adopt any directive that has to do with tax.

So all EU member states, except Poland, had agreed to adopt to the GloBE pillar 2 directive at the Economic and Financial Affairs Council's (ECOFIN) May 24 meeting of this year. So that was a bit of a surprise because we all, everyone thought that maybe Hungary would be the one to be the main holdout, but Poland ultimately lifted its opposition to the directive at the ECOFIN June 17 meeting, but then Hungary changed its mind and vetoed the directive.

And then after that, the Hungarian parliament adopted a resolution to reject the pillar 2 directive. So now Hungary is the holdout and countries have been really trying to get them on board.

But it's interesting because the Hungarians initially agreed, but then they changed their mind and then they went on this offensive in the press, U.S. press and the Hungarian press, about how pillar 2 is terrible for their country. And Republicans seized on this and started corresponding with the Hungarians about sinking the pillar 2 directive and the pillar 2 in general, because they think that pillar 2 is going to be bad for U.S. businesses. It's obviously a political play, because the Republicans wanted to sink the Biden administration's plans for pillar 2, for global minimum taxation because global minimum taxation was a big cornerstone of the Biden administration's agenda.

So yeah, it's been really weird. It's been very interesting, really weird to report on, but fascinating.

Meanwhile, the U.S. Treasury suddenly decided that they would terminate the 1979 U.S.-Hungary treaty, citing Hungary's opposition to the pillar 2 directive as a reason, which was another twist in this ongoing saga. So kind of an odd move because the 1979 treaty is the old treaty and the U.S. has been trying to approve a new treaty with Hungary, but that has been stuck in the Senate for a long, long time.

So I don't know what exactly is going to happen, but keeps me busy and interested and our readers happy that we're covering all this because it really is a bit of a soap opera. I can totally see a Netflix special about all of this because I think it's fascinating.

David D. Stewart: Well, I think you might need to write a treatment on that when this is all said and done.

All right. So why don't we turn to, you mentioned some letters, some correspondence from Republican lawmakers, how is implementation going in the U.S.?

Stephanie Soong Johnston: Well, the Biden administration actually managed to get— So the main things that the U.S. needs to do is reform its GILTI regime. Which, the GILTI regime actually inspired those GloBE rules in some ways, but some changes are needed so that the GILTI is more in line with the GloBE rules. So the U.S. has to change the rate to 15 percent and also change the regime so that it applies on a jurisdictional rather than worldwide basis.

So those are the two main changes they need. It's not perfect, but it is enough for other countries to accept the GILTI regime as what they call a "qualified income inclusion rule," under pillar 2.

And so, the Biden administration did manage to pass those two changes through the House, in the Build Back Better Act. But as you all know, the Build Back Better Act has been stalled in the Senate for a long time. And of course, you know that the Democrats hold a razor thin majority there and the administration needs the Senate to pass these changes.

So recently Joe Manchin (D) of West Virginia, he went on West Virginia radio and said that he is not going to support the minimum taxation provisions in any bill. So that is going to be a hurdle because Democrats or the Biden administration needs Manchin's vote, but politics, we'll see what happens.

David D. Stewart: I guess there's a lot of that going on at the moment. We've got a sort of unanimity rule in the U.S. Senate, at least for the Democratic caucus.

What's next for the project? Where do things go from here?

Stephanie Soong Johnston: I think it's just going full steam ahead. Just going to keep going. Actually someone asked me, "Why don't we just stop this madness?" But the OECD Secretariat cannot stop unless someone tells them to.

So until that happens, until a G-20 says "OK, we're abandoning all of this," they're just going to keep going.

So the next steps, the most immediate next step is the amount A consultation. I understand that the amount A consultation meeting will be in Paris sometime in September. So stay tuned for details about that.

And yeah, I guess just keep on keeping on at this point.

David D. Stewart: All right. I'm sure you'll keep us up to date on everything that happens going forward. Stephanie, it's always great to have you. Thank you for being here.

Stephanie Soong Johnston: Thanks. Good to be here again.

David D. Stewart: And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Steven Curtis breaks down Cisco's cost-sharing arrangement and explains how corporate taxpayers have been able to exploit the cost-sharing regulations to shift billions in profits offshore. Caroline Rule provides an overview of how an employer may offer tax-deductible abortion related travel benefits after the recent Dobbs [v. Jackson Women's Health Organization] decision. In Tax Notes State, three COST professionals examine key issues regarding state sales taxation of digital commerce. Naomita Yadav examines California's taxation of non-resident individuals and trust. In Tax Notes International, Heydon Wardell-Burrus wonders if pillar 2 can be used to save pillar 1. Paulo Panteghini and Antonella Caiumi comment on the EU's proposed debt equity bias reduction allowance directive. In Featured Analysis, Joe Thorndike questions if slumping stocks will do market-to-market tax reforms. And now, for a closer look at what's new and noteworthy in our magazines, here's Tax Notes Executive Editor for Commentary Jasper Smith.

Jasper Smith: Thank you, Paige. I'm here with Heydon Wardell-Burrus, a researcher at the Oxford Center for Business Taxation, who is also completing his PhD in law at the university of Oxford. Heydon, welcome to the podcast.

Heydon Wardell-Burrus: Thanks for having me.

Jasper Smith: So we're here today to discuss your Tax Notes International cover article, "Can Pillar 2 Be Leveraged to Save Pillar 1? " Can you give us a brief overview of your article?

Heydon Wardell-Burrus: Sure. So I'm effectively looking at this question about how pillar 1 can be designed in a way that will be acceptable to the inclusive framework and whether there are any opportunities to leverage devices within pillar 2 in order to achieve that outcome.

And so, stepping back as to what pillar 1 is trying to achieve, we're effectively looking to reallocate some taxing rights towards the market jurisdiction. So we currently tax in the places of production where employees and so forth are located. That's where profit is currently taxed and market jurisdictions are saying effectively, "Hey, we should have a certain taxing right over profits related to our jurisdiction." And so pillar 1 creates this concept of amount A under which there would be a reallocation of residual profits towards market jurisdictions.

And this leads to kind of three big questions. First, how much should amount A be and how do we tie it to each market jurisdiction? And I don't really address that in my proposal.

The second question is, well how do we impose this additional taxation when there might not be a resident entity in the market jurisdiction? There might not be a PE there either. And other jurisdictions might be treaty protected.

And then the third question is, how do we identify a jurisdiction that's going to give up some taxing rights, so we avoid double taxation over the amount that's been reallocated?

So my proposal focus is on the last of those two questions. How do we impose this tax? And then how do we identify the seeding jurisdiction? And in both cases, I look to infrastructure from pillar 2, which would be able to assist us doing that.

So in terms of imposing the liability, the aim here is to leverage the concept of a top-up tax under pillar 2. So pillar 2 effectively says, "If there are profits which are under taxed in the source jurisdiction, the source jurisdiction can tax them. But if they don't, we're going to impose top-up tax somewhere else in the group, under the income inclusion rule (IIR) or the under-taxed profits rule (UTPR)."

So there's really no incentive for the MNE not to pay the full amount of tax in the under-tax profit jurisdiction. We can leverage that mechanism in the context of pillar 1 by effectively saying, "Well, if the amount A allocation for a particular country is imposed on the group, the group can pay that liability or we're going to impose additional top-up tax under the IIR or UTPR."

Now the aim here is not to collect that tax under the IIR or the UTPR, it's just to create the right incentives for the multinational group to pay the market jurisdiction. Even if it doesn't have a taxable presence in that jurisdiction. And in the article, I go into some mechanisms by which we can create the right additional incentives, rather than just making the MNE indifferent to whether they pay top-up tax or the market jurisdiction. So that answers that second question on imposing the tax liability.

The second and more controversial issue, which I try and address, is how do we identify the seeding jurisdiction? Or the jurisdiction that's expected to give up tax and rights? And here I say, "We can leverage the pillar 2 concepts of excess profit and effective tax rates." And I effectively say, "We should take jurisdictions with excess profits and we should make the seeding jurisdiction be that with the lowest effective tax rate."

And the theory behind this is driven by the idea of, "Well, where do multinationals move their mobile income?" The concept of residual profits is that they're mobile in the MNE and they're not tied to the market jurisdiction. So where are MNE currently locating these excess profits? They're doing that in low-tax jurisdictions and therefore those are the right jurisdictions from which we should take the current taxing rights and reallocate them to the market jurisdiction.

Now, that has some key benefits in terms of how the rules would apply in practice and hopefully how acceptable they are to key jurisdictions. And I think we just have to own up to there's a clear political imperative to get the United States on board. And part of designing the seeding mechanism in this way means that the U.S. is generally unlikely to be a seeding jurisdiction, because it's not likely to have the lowest effective tax rate of the entire multinational group. In so far as there are excess profits being booked in the United States, they mostly come from the U.S. market. Whereas if there are excess profits being booked outside the United States, excess profits that are coming from out of the rest of the world are more likely to be booked there at lower tax rates.

And so, in so far as we're pushing for a bipartisan consensus to say, "Get this through the Senate in the United States, this makes it more attractive." But, assuming we can't get bipartisan consensus in the United States, something that works quite well about this design is that it doesn't require Senate ratification.

It would allow for domestic legislation in the United States to implement the rule set. And it could do this by effectively domestic tax changes, which would prevent double taxation arising if the United States were identified as the seeding jurisdiction, but also to ensure that the United States could pick up its own amount A allocations.

And the perhaps even more controversial part of this design is that a question arises to whether or not the proposal could work even prior to domestic legislation in the United States on an interim basis.

I'm quite clear that I think it's important to have domestic legislation and for the legislation to pass Congress for legitimacy reasons. But if this design very rarely identifies the United States as a seeding jurisdiction, we might find that the mechanism can effectively work in operation without the United States passing extra legislation and we could relieve double taxation in those rare instances through other mechanisms. So that's effectively the proposal I put forward, and there's a short summary of that proposal's outlined in the Tax Notes International piece and then there's a more detailed paper underlying that, which is a Oxford Center for Business Taxation working paper that's available online.

Jasper Smith: We definitely can hear from your description of the article the importance of such a topic. But was there anything specifically that prompted you to write about it?

Heydon Wardell-Burrus: So my work is mostly focused on pillar 2 and I wrote an article recently for Tax Notes about whether or not the interaction mechanism between CFC rules and pillar 2.

But in my work focusing on pillar 2, I certainly have been thinking about the incentives that are created and what's available through that infrastructure. And naturally pillar 1 discussions do come up and it seemed to me that there was an opportunity to bring those two together and that was really the origin of the idea.

Jasper Smith: Very nice. Well, thank you again for the description. I'm sure our readers are now looking forward, if they haven't already, to going and checking out your proposals. In addition to the article, can you explain to the listeners where they might be able to find you online?

Heydon Wardell-Burrus: Sure. Well, I'm on LinkedIn. I've got a relatively rare name, so I'm easy to look up and I'm on Twitter. Not particularly active on Twitter, beyond posting new material that I put out, but I've been enjoying engaging with those and discussing these ideas as well. So I'd love to hear from your listeners on one or one of those two platforms.

Jasper Smith: Well, very nice. Thank you and thanks again for coming on the podcast with us today Heydon.

Heydon Wardell-Burrus: Thank you very much for having me.

Jasper Smith: And for listeners you can find Heydon's article online at And please be sure to subscribe to our YouTube channel Tax Notes for more in-depth discussions on what's new and noteworthy. Again, that's Tax Notes with an S. Back to you, Dave.

David D. Stewart: That's it for this week. You can follow me online @TaxStew. That's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at And as always if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.