How BEPS 2.0 seeks to ensure a more level tax playing field

The two pillars of BEPS 2.0 that will affect companies

In January 2019, following the initiative of the G20 leaders, the OECD announced that it would engage in renewed international discussions to focus on two central pillars: one pillar addressing the broader challenges of the digitalization of the economy and focusing on the allocation of taxing rights, and a second pillar introducing minimum taxation standards. These initiatives involve more than 130 countries to achieve a consensus position.

Pillar One

• With the Pillar One proposal, the OECD is developing a new right to tax highly digitalized companies but also consumer-facing companies who reach consumers in a jurisdiction through digital means. When these companies generate revenues from consumers or use consumer data even without being physically present in such a country, they will become subject to tax. Since the current proposals also target consumer-facing companies who sell either directly or via intermediaries to a consumer, many multinational companies may potentially be affected by these new proposals.
• These proposals contain a fundamental change to the existing transfer pricing rules. The proposal introduces the use of a formulary-based approach to allocate profits between companies or branches. This is an important evolution and it will be interesting to see how both sets of rules will co-exist.

Pillar Two

• Pillar Two represents a substantial change to the international tax landscape, striving to ensure that a multinational corporation will pay a minimum level of tax on its profit.
• The OECD does not want to force countries to introduce a minimum rate, but will under this proposal impose a minimum taxation on its foreign income received by foreign subsidiaries and branches that are taxed at a rate lower than this minimum rate.
• Several measures are defined to achieve this goal, ranging from an additional tax at the parent company level for lowly taxed foreign income, to source taxation (withholding tax or deduction limitation) for payments made to lowly taxed companies.
• This proposal is expected to affect both the behavior of taxpayers and policy-makers in the jurisdictions and wants to stop the race to the bottom on corporate tax rates.
• There are still many challenges to achieve a workable, simple and transparent model to achieve these objectives, but the OECD is reporting good progress and aims to come to some conclusions by the end of 2020. Not all corporations would be subject to such a minimum taxation and mostly the globally active multinationals with a certain minimum turnover may ultimately be subject to these rules.

Both with Pillar One and Two, the OECD strives for a coordinated and multilateral approach, as there is a risk that many jurisdictions will take unilateral actions to protect or attract their tax bases, with adverse consequences for all jurisdictions, leading to double taxation and controversy.

These measures are meant to lead to a better level playing field between countries, reduce tax competition between countries and give taxing rights to jurisdictions where the company has no physical presence but is active in its market.

The implementation of BEPS has much support

The OECD negotiated with more than 130 countries to substantially reform and recalibrate the international tax system. More than 100 countries have already indicated that they will implement the OECD proposals in their own legislation. It should be noted, however, that – despite multilateral negotiations – several countries are going ahead with measures of their own to tax major players in the digital economy.

Differences in tax rates between EU Member States

Tax rates in Europe vary widely. Large countries such as France and Germany have a rate of approximately 30%, while Ireland has a statutory tax rate of 12.5% and Hungary of only 9%. The average rate in the EU is between 20 and 25%.

It is clear that tax rates, and in general tax rules, always have and will be an important investment criterion. The BEPS 1.0 rules have changed international tax rules but have not imposed minimum taxation rules. With BEPS 2.0, the tax regime may potentially become less of a differentiator for multinationals as a criterion to invest in a jurisdiction to perform part of the business operations of a group.

Consequently, large EU countries advocate a healthy tax base as well as measures to reduce competition on the basis of tax regime by introducing minimum taxation rules.

Countries are preparing for BEPS 2.0

In assessing the impact of these new OECD initiatives, one can generally distinguish four categories of countries within Europe:

• Countries with many headquarters and a large market, such as Germany and France.
• Cr countries with many headquarters, but with a smaller internal market (and therefore export-oriented) such as the Netherlands, Sweden, Denmark, Finland,...
• Small countries with few multinationals and a small internal market.
• Countries with few multinationals (Ireland, Luxembourg,...) that, as regional hub offices, have managed to create a strong economy thanks to their tax regime.

It is clear that the measures of BEPS 2.0 will impact these economies differently. The OECD has measured in its impact analysis that the BEPS 2.0 initiatives will increase global tax revenue by 4%, indicating that the economies with the highest direct investments (hubs) will be impacted most. Many countries have already carried out impact analyses in order to examine the impact of tax-neutral measures on their income flows and to take balanced policy measures.