OECD and country officials discuss BEPS 2.0 Pillars One and Two and other OECD tax work

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EY Global

6 Nov 2023
Subject Tax Alert
Categories BEPS 2.0
  • Senior members of the OECD Secretariat and government officials from several Inclusive Framework jurisdictions participated in a conference in Washington, DC on 30-31 October 2023.
  • The conference featured extensive discussion of the ongoing work on Pillars One and Two, with government officials providing their countries’  perspectives on both pillars.
  • The OECD and government speakers also discussed focus areas for future tax work, including addressing global mobility of workers and reconsidering existing international tax rules in a Pillar Two environment.

Executive summary

The US Council for International Business (USCIB) and the Organisation for Economic Co-operation and Development (OECD) held their annual tax conference in Washington, DC, on 30-31 October 2023. The bulk of the discussion at the conference focused on developments with respect to Pillars One and Two of the ongoing project on addressing the tax challenges of the digitalization and globalization of the economy (the Base Erosion and Profit Shifting (BEPS) 2.0 project). In addition, there were sessions on the OECD's work on global mobility of workers, carbon mitigation and tax certainty.

Senior members of the OECD Secretariat participated in the conference, along with tax officials from several Inclusive Framework member countries who are responsible for their countries' participation in the tax work of the OECD, including officials from Argentina, Canada, Germany, Italy, Jamaica, Singapore, Spain, the United Kingdom and the United States.

Detailed discussion

Welcome and plenary

In her remarks to open the conference, US Assistant Treasury Secretary for Tax Policy Lily Batchelder discussed the considerable progress that has been made on Pillars One and Two, but she noted the importance of seeking stakeholder views as part of the Treasury Department's consultation on Pillar One, which runs through 11 December 2023. She said that ultimately Congress will need to approve the Amount A multilateral convention (MLC). She described input from business stakeholders on the consultation as critically important as they work through the MLC and commentary because Amount A is a novel and complex design for new taxing rights.

She added that developing a consensus text is critical, with the objective being to create stability in the global tax system, eliminate digital services taxes (DSTs) and promote certainty. She concluded her remarks on Pillar One by highlighting open issues that include balancing the reallocation of profits with the prevention of double tax as well as the need for assurances on the removal and no further enactment of DSTs. Noting Canada's actions to move forward with its legislation to enact its own DST and the US's long-held position in opposition to such measures, she assured the audience that there are bilateral conversations with Canada happening at every level.

Batchelder also reiterated the Biden Administration's support for Pillar Two and pointed to the simplification that she believes will result for US business, relating to how Pillar Two taxes are collected and the fact that other countries' Pillar Two taxes would be turned off if the US is in compliance. She added that the US continues to work with its Inclusive Framework partners on additional administrative guidance and said that an important priority for the US continues to be the treatment of the US research and development (R&D) tax credit, indicating that the US continues to raise this issue in the multilateral negotiations on future guidance and that she is hopeful there will be progress.

Batchelder also stressed the importance of other OECD tax projects, including addressing tax rules relating to global mobility and "decluttering" the international tax rules with a focus on "rationalization of other BEPS measures" in light of the movement forward on Pillar Two.

The international tax agenda

This panel on the international tax agenda going forward, which was chaired by Manal Corwin, Director of the OECD Centre for Tax Policy and Administration, focused on the substantial amount of ongoing work on these OECD tax initiatives.

Corwin stressed the importance for developing countries of the multilateral instrument implementing the Subject to Tax Rule under Pillar Two. She also highlighted the significant number of countries that have implemented the minimum standards developed in the original BEPS project, including Action 6 on combating treaty abuse, Action 13 on country-by-country (CBC) reporting, and Action 14 on improving the Mutual Agreement Procedure (MAP) relating to dispute resolution.

Michael Plowgian, US Treasury's Deputy Assistant Secretary for Multilateral Tax, elaborated on some of Batchelder's opening remarks, noting the importance to Pillar One of ironing out the last remaining details and saying he hopes that can happen as quickly as possible but indicating that the US cannot sign onto an agreement that still has bracketed items and footnotes identifying open issues. He added that obtaining agreement that there will be a standstill on DSTs is of critical importance to the US, noting that the US is engaging with the Canadian government on multiple fronts because Canada, which did not sign onto the conditional agreement to extend the standstill announced in July, seems to be moving forward with their DST.

Marlene Nembhard-Parker, Co-chair of the Inclusive Framework and Deputy Commissioner General — Legal Support Services for the Jamaica Tax Administration, also stressed the need to address these Pillar One open items. She said that although it is wonderful to have consensus on the architecture for the new taxing right under Amount A, developing countries are very focused on the complexity of the rules and the costs they will incur to administer those rules. She indicated that some complex political and technical issues remain to be resolved, and she also expressed concern that the continued delay in the Amount A MLC entering into force is putting pressure on DSTs. She added that negotiations over Amount B remain difficult because its success will depend on the final rules, noting that low-capacity jurisdictions are insisting on objective rules while developed countries seek more subjective rules.

From the private sector, two business representatives highlighted areas where continued work is necessary on the two Pillars. On Pillar One, they stressed the need for continued work on withholding tax adjustments, for example, and expressed concern that some of the triggering thresholds in the Amount A calculations seem arbitrary and will have cliff effects that will create uncertainty. They added that more work needs to be done to ensure that rational business practices are not upended by the Pillar One rules. They also noted the continued ambiguity in the Amount B draft, which could undermine the level of certainty for taxpayers and tax administrators that Amount B is intended to provide.

On Pillar Two, the business representatives noted the inconsistencies in countries' implementing legislation, highlighting the continuing uncertainty regarding how new and future administrative guidance will be incorporated into domestic legislation. They pointed out the high compliance burden they will face and how that burden will far outweigh any additional tax that will arise under Pillar Two. Finally, one business representative stressed the complexity and uncertainty facing US MNEs because of the interaction between US tax rules and Pillar Two. He argued it is unfortunate that the US and Inclusive Framework have moved away from the notion, advanced during the last year of the Trump Administration, that the US global intangible low-taxed income (GILTI) rules should be grandfathered and deemed to be compliant with Pillar Two. He further contrasted the position of the current Biden Administration that the GILTI rules should be changed to move to a jurisdiction-by-jurisdiction calculation and a 15% rate to be treated as compliant with Pillar Two.

Returning to the theme of decluttering, Lily Faulhaber of Georgetown University Law Center pointed out that the OECD continues to add new projects on top of the projects that have been completed, suggesting that a long-term goal should be to streamline what has come before. She asked: if we're successful in implementing the two-pillar solution, at what point can we undo what came before?

One of the business representatives echoed that view, maintaining that if there is a global minimum tax in place, we should step back and determine what rules that are in the system now would no longer be needed? Another business representative analogized that we still have unopened boxes in the attic and moving vans are pulling into the driveway with more boxes, highlighting a concern expressed by business representatives throughout the conference that there continues to be a real threat of double tax under both Pillars.

Pillar One, removal of DSTs and improved tax certainty

This session, which was chaired by Achim Pross, Deputy Director of the OECD Centre for Tax Policy and Administration, focused on the MLC on Pillar One Amount A, the timing on implementation of Amount A and the implications for DSTs and other similar measures.

Pross began with the recently released MLC. Commenting on the length of the documents — almost 900 pages — Pross stated that this reflects the inherent complexity of the topic and the desire of the Inclusive Framework jurisdictions to provide truly useful guidance, rather than a short explanatory statement leaving a ream of unaddressed issues. He analogized it to trying to produce a car with a working engine rather than just a nice looking exterior. Mike Williams, Director of Corporate Tax at the UK's HM Treasury, agreed, noting that because there is a pressing need for international consistency, a more detailed approach was necessary.

Michael Plowgian noted the particular complexity of the marketing and distribution safe harbor (MDSH) rules but also expressed the view that the underlying concept is fairly simple: if the market jurisdiction already taxes excess profits of the group, there will be a reduction in the Amount A taxing rights to the extent of this deemed double counting. Once the amount of deemed double counting is determined, a separate question is how much of it should be offset? Inclusive Framework jurisdictions primarily have one of two views: 100% (reflecting full relief of the amount of double counting), or 25% (reflecting that Amount A is intended to capture 25% of excess profits). In effect, the MLC represents a compromise: if the functions of the group are just marketing and distribution and are tied to marketing intangibles, then the relief should be 100%. If there are more fully functioning subsidiaries in the jurisdiction and the residual accounts for more than marketing and distribution, then the relief amount should be 25%. One final point of Inclusive Framework compromise is that the final numbers used in the MLC are 90% and 35%, rather than 100% and 25%.

Plowgian further noted that taxing rights for purposes of the MDSH include withholding taxes on deductible payments, which is the source of some of the additional complexity in the MLC (the inclusion of withholding taxes in the MDSH is a new feature). Withholding taxes are translated into a measure of profits and then subject to an additional set of adjustments (meaning there are two sets of adjustments associated with withholding tax payments, including the more general adjustment to the level of offset provided by the MDSH).

With respect to tax certainty, Pross noted that mandatory binding certainty is not area on which countries easily agree. Both Plowgian and Williams stated that binding arbitration is critical for the US and the UK and agreed that the fact that Amount A is a new taxing right might help facilitate greater acceptance of binding arbitration in the MLC than has been the case under existing tax treaties.

Carlos Eduardo Protto, Director of International Tax Relations for Argentina's Ministry of Treasury, said that this is a particularly difficult topic for many Inclusive Framework jurisdictions. He agreed that, because Amount A is a new tax and because certain aspects are very complex (such as the detailed sourcing rules), countries that otherwise are against mandatory binding arbitration are more willing to engage in the discussion in the context of Amount A.

A key aspect of Amount A, for the US in particular, is the elimination of existing and new DSTs. Although Plowgian acknowledged that the ongoing work on the MLC will extend beyond the current December 2023 signing deadline for further extension of the DST moratorium, he expressed confidence that the moratorium will remain in place while the MLC is finalized.

Williams stressed the UK's commitment to remove DSTs as part of its agreement to adopt the MLC. He stated that the UK has a DST because of concern about slow progress on digital taxes in the original BEPS project, a concern he described as having in fact been realized. But, he stated, the UK stands ready to make the remaining compromises to reach consensus beyond the broad agreement that was reached in October 2021. Williams indicated that the UK will continue to raise revenue through the DST but has always intended to remove DSTs if there is a global deal, noting "that is what we said at the outset of the project, and that is still our position."

Protto indicated that, unlike the UK, Argentina does not impose a DST. He similarly expressed some dissatisfaction with the slow progress of the Pillar One project and stated that Argentina may implement a DST if further progress on Amount A is not made. However, he said that any DST would be subject to the permanent establishment provisions in Argentina's tax treaties and thus would only take effect with respect to countries with which Argentina does not have a tax treaty.

Business representatives on the panel stressed that DSTs are destabilizing and are contrary to countries' investment incentives. They noted that there seems to be a political consensus that such discriminatory measures should be phased out, with especially strong support on this point in the US.

Plowgian noted the planned public consultation on the MLC in the US, reiterating that this is an important step that may help the US to ultimately sign on to the MLC.

Williams stated that, because of the different governance structure in the UK's parliamentary system, further consultation is not needed in the UK. He also noted that the UK does not typically hold consultations when a document is at this stage of development.

Protto said that Argentina will not be calling for additional consultation; it is not a legal requirement in Argentina and they would not want to further delay the process.

Finally, Plowgian noted the interconnectedness of all the Pillar One elements, including elimination of DSTs, greater certainty on Amount A and a robust Amount B, which he sees as all part of the overall framework.

Keynote address

In his keynote address, Peter Blessing, Associate Chief Counsel (International) at the US Internal Revenue Service (IRS), largely focused on issues other than Pillars One and Two. He instead spent most of his time discussing upcoming US Treasury and IRS guidance projects. Before getting into the substance, however, he acknowledged that following the rush of guidance in the first few years after the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017, the release of guidance has slowed recently. He attributed this slow pace of guidance to the time-consuming and difficult process of building consensus among all stakeholders, including considering and incorporating comments on regulation projects.

Blessing then turned to major guidance projects that he is expecting will be released in the relatively near future. His first topic was foreign tax credits and he indicated that a notice will be released before the end of 2023 that addresses three topics. First, it will extend the partial deferral of the foreign tax credit regulations that were published in early 2022 (2022 FTC Regulations). These regulations were very controversial. While they were described as a response to "novel" extraterritorial taxes, such as DSTs, the 2022 FTC Regulations were much broader in scope. Earlier this year, Treasury and the IRS released Notice 2023-55, which suspended the 2022 FTC Regulations for tax years ending on or before 31 December 2023.

Importantly, Blessing noted that, due to competing priorities such as guidance on the new corporate alternative minimum tax, the IRS is not actively working on revising the 2022 FTC Regulations at this time. Despite that, he noted the tax policy concerns that led to the 2022 FTC Regulations are still valid. Those concerns include novel extraterritorial taxes, referenced above, and the difficulty that the IRS faced in applying the prior regulations, which in some cases required empirical analyses of the impact of a foreign tax law. With respect to novel extraterritorial taxes, he noted in particular "section 49" under German law (which can impose German taxation on transfers of intellectual property with limited nexus to Germany) and two issues under Australian law (the diverted profits tax and the characterization of software sales as including an embedded royalty).

Second, the notice will address the creditability of certain Pillar Two taxes, including qualified domestic minimum top-up taxes (QDMTTs) and taxes under the income inclusion rule (IIR). Blessing noted that there are special issues with respect to taxes imposed under the undertaxed payments rule (UTPR) and, because that rule is not anticipated to be in effect until 1 January 2025, the creditability of those taxes will not be addressed until a later time.

Third, the notice will address certain dual-consolidated loss (DCL) issues that arise due to the jurisdictional scope of the Pillar Two rules. In particular, there is a question as to whether the introduction of QDMTTs, IIRs and UTPRs (potentially even during the transitional safe harbor periods) could result in "foreign use" of previously deducted DCLs, thereby triggering a recapture of those losses. Blessing indicated that recapture in these circumstances is unintended and unwanted by the IRS. Blessing further indicated that any relief provided under the DCL rules under this notice would be temporary.

In terms of further near-term guidance, Blessing highlighted a few items:

  • Internal Revenue Code (IRC) Section 987 regulations addressing nonfunctional currency branch transactions are expected to be released before the end of 2023.
  • Regulations under IRC Section 4501, addressing certain issues under the stock buyback excise tax, are expected to be released relatively soon.
  • Previously taxed earnings and profits (PTEP) regulations are not expected to be released until 2024; these regulations have been highly anticipated since the enactment of the TCJA and have been delayed many times.

Blessing also mentioned a project addressing the sourcing and character of certain cloud computing transactions, which were the subject of proposed regulations issued in 2019. It was unclear from his comments whether this project was still active and whether regulations may be released in the near future.

Looking further out, Blessing mentioned a number of items that IRS is thinking about, including broader application of IRC Section 482 beyond transfer pricing (potentially including assignment of income and similar issues), certain treaty issues, such as the application of business income provisions to domestic reverse hybrid entities, and the treatment of passive association and implicit support transactions.

Blessing also indicated that his office is interested in issuing more private letter rulings on difficult issues that taxpayers are facing. In particular, he mentioned recent rulings issued by the IRS on the treatment of "midstream" PTEP distributions. He also indicated that the IRS has been considering issues related to basis consequences under IRC Sections 961(a) and (c) but has instead decided to move on to developing more formal guidance.

Pillar One: Transfer pricing simplification and Amount B

This panel focused on the latest developments with respect to Amount B of Pillar One, which is intended to simplify and reduce disputes on the transfer pricing for baseline marketing and distribution activities.

Achim Pross, who chaired the panel, began the discussion by noting that within the Inclusive Framework there are very different views with respect to Amount B and the holders of particular perspectives do not break down into any usual camps. He also stressed the interdependence between Amount A and Amount B.

Michael Plowgian indicated that Amount B is critical for the US. He cited what he described as the incredible rise in cross-border tax disputes, noting that many disputes relate to baseline marketing and distribution activities and that disproportionate resources are devoted to these cases. He sees Amount B as a way to deal with this through a simplified and streamlined approach. In this regard, he said that scoping of Amount B is a critical matter because if scope is not clear, the current disputes over pricing could just shift into disputes over whether a transaction is in scope of Amount B.

Plowgian stated that Amount A and Amount B are linked for the US, explaining that a robust Amount B is essential for the US to sign on Amount A. He also noted that other Inclusive Framework jurisdictions are unwilling to do Amount B without Amount A. He further indicated that the US and many developing countries are aligned on Amount B.

Carlos Protto described Amount B as a positive element of Pillar One that will simplify transfer pricing in this area. He indicated that once scoping for Amount B can be defined, it will be a good solution for countries without comparables. He further stated that for some countries the interconnection with Amount A means that they will not be ready to implement Amount B yet, even though Amount B is not a new concept.

María José Garde, Director General of Taxation of the Spanish Ministry of Finance, described the objective of Amount B as ambitious, reiterating prior comments about the many different views. She described the current draft as a good product and expressed support for objective criteria on scoping.

One of the business representatives noted that because Amount B is a process that will be plugged into the OECD Transfer Pricing Guidelines, rather than a fundamental rule change, perhaps there is an opportunity to use time as a "relief valve." Doing a test run of Amount B could get countries comfortable that the streamlining of Amount B provides benefits that more than offset the perceived loss of flexibility. He also encouraged more transparency on all the empirical work that was done to develop the returns reflected in the current Amount B government, indicating that more transparency could help increase the comfort level with Amount B. Another business representative noted the interest of many businesses in an expanded scope for Amount B. A third business representative expressed concern that Amount B may not help low-capacity jurisdictions because it has gotten too complicated. He cited the qualitative elements as particularly problematic and stressed the need to reduce the areas of potential conflict.

The business representatives agreed that a safe harbor approach to Amount B would work well, and one noted that there is experience with safe harbors in the Transfer Pricing Guidelines. Protto indicated that there are differing views about this, noting that while he supports the safe harbor idea, many countries that support Amount B want it to be mandatory. Plowgian also expressed support for the safe harbor approach but agreed that the opposing views need to be considered. Garde stressed the need to get agreement and suggested that making Amount B mandatory could be the solution.

Addressing increased global mobility of workers

This panel, chaired by Achim Pross, discussed tax issues arising from the trend toward teleworking, which grew rapidly during the COVID-19 crisis and continues to exist. Business representatives confirmed that the ability to work from home or to be a "digital nomad," including greater flexibility to choose your work location internationally, have become important factors in attracting and retaining workers and serve to open new sources of talent. However, the management of tax and legal compliance, and correctly reflecting multi-location work in payroll systems, is challenging. Certainty and consistency of treatment across countries is required by employer entities as well as employees to deal with the new global worker mobility.

Silke Bruns, Director for International Taxation at the German Federal Ministry of Finance, provided a description of how Germany is aiming to simplify the employment tax rules for cross-border workers, noting the importance this topic has for Germany, which has borders with eight countries, seven of which are in the EU where there is freedom of mobility. She highlighted the four existing rules for frontier workers agreed bilaterally with these other countries, which have variations regarding scope and content. She indicated that, looking into the future with the aim of finding a more general and broader concept, the German Federal Ministry of Finance is exploring the concept that the employee should only be taxable and file a tax return in his or her country of residence (a "one-stop-shop" concept), and the other state (i.e., the country of employment) should have a right to levy withholding tax on gross salary, which would be creditable against income tax payable in the country of residence. This approach would significantly simplify tax compliance for cross-border workers, and tax revenue allocation could be addressed between the affected countries by agreeing bilaterally on the withholding tax rate that the source state could levy. She further noted that, given the partially harmonized rules for social security in the EU, the underlying need for consistency of contributions and benefits, and the different employer concept under the social security framework, this simplification for cross-border employment would only address employment taxation and not social security withholding.

Mike Williams cautioned that the simplification proposal would require source countries to give up taxing rights, which could make it difficult. He expressed concern that there currently is not sufficient global consensus on the need to embark on such reform.

Business representatives commented that there are significant uncertainties and inconsistencies of treatment globally around topics such as permanent establishment creation by working from home, including the length of presence required to create such nexus, treatment of stock-based compensation and transfer pricing issues created by mobile employees with so-called "DEMPE" roles (referring to development, enhancement, maintenance, protection, and exploitation). In their view, rather than striving toward "best outcome" scenarios, a focus of future OECD work should be further harmonization of rules, including potentially establishing safe harbors (such as for the number of days that can be spent working in another country), expanding the definition of auxiliary activities and clear guidance on permanent establishment creation through using a home office (which should occur only in exceptional cases).

María José Garde referred to a recent ruling issued by the Spanish authorities on the absence of a permanent establishment for the UK employer of an employee who worked in Spain during the COVID-19 pandemic and continued to do so afterward. She confirmed that Spain does not regard the employee's home to be at the disposal of the employer, and hence there could not be a deemed permanent establishment in this specific case. Silke Bruns confirmed that in Germany tax authorities also take this position, supported by case law from the Federal tax court. Exceptions could apply, however, for directors or high-ranking executives (who could create a management permanent establishment).

Further comments by business representatives stressed the need to focus also on guidance for situations involving mobile employees with significant control or DEMPE functions. In such situations, there could be risks of exit taxation or creation of fragmented intangible property ownership allocation. Finally, they questioned whether sufficient guidance exists for situations in which businesses operates internationally without any offices or fixed presence, using only mobile employees working from their homes.

Inclusive Forum on Carbon Mitigation Approaches

This panel on the Inclusive Forum on Carbon Mitigation Approaches (IFCMA) was chaired by Kurt Van Dender, the Acting Head of the Tax Policy and Statistics Division of the OECD Centre for Tax Policy and Administration. Van Dender described the IFCMA as an initiative designed to help improve the global impact of emissions reduction efforts, explaining that its activities primarily involve the collection, processing and analysis of relevant data and the provision of a forum to discuss potential conclusions as to the effectiveness of carbon mitigation approaches.

The discussion mainly focused on the US Inflation Reduction Act's (IRA's) energy-related provisions, which were described as unique in a variety of ways. Kyle Meng, Senior Economist and member of the White House Council of Economic Advisors, noted that the scale of the measures is unprecedented, even before utilizing the various options for further increasing credits (e.g., through additional domestic sourcing). He further indicated that the absence of any caps in combination with the transferability of credits provides for a window within which virtually anyone can benefit from the provisions. In this context, it was noted that the pricing of transferable credits is a key question but that the market has not yet developed a clear mechanism in this regard, which means that effectiveness and adoption rates should become clearer over time as more data becomes available.

It was also noted the IRA provisions, similar to other initiatives pursuing comparable goals around the world, are focused on carbon mitigation measures on the supply side and essentially use "carrots" to encourage behavioral changes. Panelists noted that, ultimately, measures on the demand side will likely also be needed and that such demand-oriented measures may require the addition of "stick" components to the system (e.g., carbon pricing). Meng commented that one of the main difficulties with carbon pricing is that a price covering the actual socioeconomic costs of carbon emissions is difficult to determine and would presumably be very high.

Pillar Two: Implementation of the Global Minimum Tax

John Peterson, Acting Head of the Cross Border and International Tax Division of the OECD Centre for Tax Policy and Administration, chaired this panel and began the discussion with an overview of the global anti-base-erosion (GloBE) rules timeline to date as well as the implementation progress around the world. He also addressed upcoming administrative guidance, with respect to four different topics: the transitional country-by-country reporting (CbCR) safe harbor, income and taxes, compliance and administration, and industry/scenario specific matters. For each of these topics, he indicated that there are aspects of the guidance work that aim to "simplify" as well as aspects that aim to "clarify."

Regarding the CbCR safe harbor, Peterson indicated that simplification includes the pushdown of purchase price accounting adjustments and the reconciliation of differences in fiscal years between subsidiary and parent. Clarification includes eligibility, anti-arbitrage, and double counting of covered taxes (particularly pertaining to permanent establishment taxes). The anti-arbitrage issue that is intended to be addressed by the guidance relates to arbitrage of differences between the CbCR safe harbor and the regular GloBE rules. Peterson indicated that the aim is to release guidance over the next month or so.

Regarding income and taxes, Peterson said the simplification piece will address deferred tax liability (DTL) recapture-related matters and profit and tax allocations for reverse hybrids. He also said the clarification piece will cover GloBE/accounting differences in the tax base of assets and post-filing transfer pricing adjustments.

Regarding compliance and administration, Peterson indicated that the simplification component involves GloBE Information Return matters, and the clarification component involves the allocation formula for blended controlled foreign company (CFC) taxes in the context of the CbCR safe harbor. The latter would, for example, address how the push-down of US GILTI taxes would work for jurisdictions that are eligible for the CbCR safe harbor, given that businesses will not have computed a GloBE effective tax rate for those jurisdictions.

In response to questions from the business representatives about DTL-related issues, Peterson indicated that the focus is on the DTL recapture rule, including how to track DTL reversals over a five-year period. Peterson said that the goal is to release guidance before year-end. Furthermore, he indicated that work is continuing on issues surrounding cross-border taxation and losses, such as deferred tax assets (DTAs) and DTLs relating to CFC charges, noting that this guidance is likely to be released after year-end.

As to the impact of Pillar Two, Peterson indicated that the OECD is planning to release an economic impact assessment based on the GloBE rules. The expectation is that there will be a 4%-8% increase overall in corporate income taxes levied around the globe.

Marlene Nembhard-Parker indicated that Jamaica is currently planning to introduce a QDMTT only and is considering direct incorporation of the OECD Model Rules, similar to the approach of New Zealand. Yah Fang Chiam, Deputy Commissioner, Business Group, Inland Revenue Authority of Singapore, confirmed that tax incentives will remain part of Singapore's fiscal toolkit. Isaac Wood, Attorney-Advisor with the US Treasury Office of Tax Policy, acknowledged the complexities around DTAs and DTLs, but reminded the audience that the alternative to a system with deferred taxes would have been a carryover system and that a deliberate decision was made to use the deferred tax approach. Wood reiterated the intention to release a notice on the foreign tax creditability of Pillar Two taxes before year-end, consistent with the comments made by Blessing earlier in the conference.

Pillar Two: Rule coordination, dispute prevention and resolution

Achim Pross, who chaired the panel, began the discussion by indicating that if governments accept simplification, such as the transitional CbCR safe harbor, they necessarily are accepting approximation. Pross called on the business community to behave responsibly and not abuse these simplified rules, as that would prompt the OECD and Inclusive Framework members to develop more detailed rules.

John Peterson provided an overview of dispute prevention, to be achieved through rule coordination, compliance coordination, and advance certainty. He also covered the GloBE Information Return process. As to dispute resolution, Peterson acknowledged that more work needs to be done. For example, there are questions around whether existing treaties can be relied upon, whether a multilateral convention needs to be developed, and whether reciprocal domestic provisions can be used. Marco Iuvinale, Director of European and International Tax Affairs for the Italian Ministry of Economy and Finance, reported that Italy has proposed a novel dispute prevention and resolution mechanism to be included in their domestic law, which will allow the Italian tax authorities to cooperate with other jurisdictions if they have a similar reciprocal process.

Peterson indicated that the Inclusive Framework is in the process of agreeing to a self-certification approach, under which jurisdictions can self-certify their Pillar Two legislation, likely through a process of answering a questionnaire and compiling a comparison between their local rules and the model GloBE rules. In-depth legislative review by peers will follow in a second stage. In response a question from a business representative, Peterson indicated that if the peer review process determines a jurisdiction needs to update its legislation, that jurisdiction would only lose its qualified status prospectively.

In response to another question from a business representative, Peterson explained that the jurisdiction in which the GloBE Information Return will be filed will not dictate the GloBE computations. Rather, the computations will be determined by the jurisdiction (or jurisdictions) that apply the IIR.

An audience member asked Peterson about the application of local accounting standards for purposes of the QDMTT safe harbor rules, considering that the July Administrative Guidance allows countries to apply local accounting standards or accounting standards of the Ultimate Parent Entity (UPE). While acknowledging that countries can choose either option, Peterson indicated that the OECD is encouraging countries to apply UPE accounting standards.

Post-Pillar Two implementation opportunities — Rationalization of other BEPS measures

This panel, chaired by Manal Corwin, addressed whether the implementation of the global minimum taxation rules would mean that a "decluttering" of existing tax rules was possible and in fact advisable. Achim Pross referred to the May 2022 OECD report, Tax Co-operation for the 21st Century: OECD Report for the G7 Finance Ministers and Central Bank Governors (pdf), which suggested taking an inventory of existing domestic rules that may address the same or similar risks as the global minimum tax framework. He recommended that countries ask themselves whether they would have introduced the specific rule in a Pillar Two environment and, if the answer was no, to consider changing or abolishing the rule. Examples of rules that could no longer be needed include deduction denials for payments to low-tax recipients, tying participation exemptions to a minimum level of taxation, CFC imputation tax systems, as well as minimum tax systems such as the US corporate alternative minimum tax. The simplification that could be achieved this way could also free up resources for tax administrations.

Silke Bruns reported that Germany is already taking this simplification potential into account in its Pillar Two implementation legislation by also proposing to reduce the low-tax threshold in its CFC and royalty deduction limitation rules to 15% (from the current 25%). Though the law has not yet been finally passed, she expressed optimism that this will happen by year-end. Marco Iuvinale confirmed that certainty and stability in the tax system continued to be an important goal in his work and that space for further rule simplification exists.

Business representatives encouraged policymakers and countries to be bold about decluttering and rolling back no-longer-needed anti-abuse rules in the international tax area. As an example, it was suggested that Germany should completely abolish its royalty deduction limitation rather than just reducing the threshold tax rate for its application. Other areas that were mentioned as warranting a review post-Pillar Two were the EU Anti-Tax Avoidance Directives, the new EU BEFIT proposal and US rules such as GILTI, Subpart F, the corporate alternative minimum tax, and the BEAT rules.

Bruns and Iuvinale agreed that the local inventory of rules and future legislation at both a national and EU level ideally should be internationally coordinated and should follow a common goal of achieving more certainty and simplicity while creating a level playing field, which could also help political acceptance.

Finally, business representatives noted the complexity of adapting existing US tax rules, in particular, and stressed how important support from Congress would be for advancement of any decluttering effort in the US.

Tax certainty beyond the Pillars

This panel, moderated by Bob Hamilton, Commissioner of the Canada Revenue Agency and Chair of the Forum on Tax Administration, focused on the current status and recent developments in tax certainty.

The discussion started with general remarks on the tax certainty environment. As recognized by G20 Finance Ministers, maintaining and enhancing tax certainty benefits taxpayers and tax administrations alike and is key in promoting investment, jobs and growth. Hamilton indicated that enhancing tax certainty is one of the main priorities of the Forum on Tax Administration, which brings together more than 50 advanced and emerging tax administrations.

The business representatives highlighted that key reasons for the increase in international tax disputes are the subjectivity of some of the rules and the lack of common interpretation. They also indicated the costs associated with the increasing amount of time required to solve disputes, noting that working on streamlining the process to reduce these lengthy periods is critical. In this regard, the BEPS 2.0 project has created the need to react at a much faster pace when dealing with controversy.

María José Garde indicated that it is key for tax policy makers to ensure that tax rules are clear and provide interpretation guidance. She also highlighted that a good relationship environment between the tax administration and taxpayers to build common trust and mutual collaboration should be a main focus. In that respect, she pointed to the introduction in Spain of specific collaboration programs that where initially targeted to large multinationals and have since been expanded to other sectors. She also highlighted the increased resources devoted in recent years to advanced pricing agreements (APAs), the publication of interpretation guidance on general anti-avoidance rule (GAAR) application, the recent program where taxpayers can discuss transfer pricing matters in anticipation to any potential controversy and the transparency report program where taxpayers voluntarily share information with tax authorities with the aim of discussing risk areas and providing a rapid response in anticipation of any disputes.

Nicole Welch, Director of Treaty and Transfer Pricing Operations for the US IRS, referred to the need to address controversy in a wholistic way, considering all phases of the tax compliance cycle, and the importance of maintaining an open dialogue with taxpayers. She cited the good outcomes of the Compliance Assurance Program (CAP) in the US and the ICAP (for International CAP) internationally in building a platform for mutual understanding. Although not new, it was also noted that (1) a prefiling agreement program where non-transfer-pricing related issues could be discussed would be another good model for improving tax certainty and (2) this could be a good opportunity to revisit such a program to increase participation by taxpayers.

The discussion then turned to dispute resolution mechanisms and the potential ways to improve them. In general, panelists indicate that the increased complexity of the international tax rules create the need for better and more efficient dispute resolution mechanisms. Panelists welcomed the general improvement of MAP process across the world, reflected in the MAP statistics publications by the OECD, and noted how such publicity has helped some countries make their cases for requesting more resources to be devoted to MAP and arbitration programs.

The panel closed with some final remarks on what to look forward to in terms of improving tax certainty. The representatives of tax administrations indicated that more focus should be given to dispute prevention and better processes for dealing with complex issues outside transfer pricing (e.g., foreign tax credit issues). Other panelists indicated that more work is needed to guarantee access to MAP around the world and to explore the potential for more transfer pricing safe harbors. Reducing the time required for APAs, in particular with respect to less complex cases and renewal of APAs, was also highlighted as an area of focus for improvement.

Closing remarks

This panel was chaired by Rick Minor, Vice President & International Tax Counsel of USCIB. Business representatives on the panel focused on the reality of Pillar Two implementation and highlighted how the discussion has now turned to ensuring efficient implementation of the rules across the world. They also agreed that now is the right time to think about decluttering measures that were introduced in the past and now may be redundant or outdated, noting that because countries will need some time it is important that they focus on priority areas. They also noted the sense of urgency that the BEPS 2.0 project has created, stressing that it is important that this urgency does not conflict with the need for a good outcome that protects against the creation of double taxation and provides needed tax certainty. Lastly, one of the business representatives reiterated the importance of Amount B for the success of the BEPS 2.0 project.


The discussion at the conference underscored the strong political momentum with respect to Pillar Two global minimum taxes and continuing political interest in all aspects of Pillar One. It also reinforced that there continue to be divergent views among Inclusive Framework jurisdictions on aspects of both pillars.

On Pillar Two, the OECD Secretariat and government officials highlighted the ongoing work in the Inclusive Framework on additional administrative guidance to address technical issues and finalization of the peer review process for making determinations with respect to the qualification status of the Pillar Two rules that countries are now implementing. On Pillar One, the government officials expressed strong views regarding the importance and interconnection of Amount A, Amount B and the elimination of DSTs and other similar measures.

The OECD Secretariat and government officials also foreshadowed new focus areas for global tax policy work, including the interest in decluttering the international tax rules in a post-Pillar Two environment and the value of working together to address the tax issues that arise with the increase in the global mobility of workers.

Businesses should follow developments closely, both in the global discussions and in the implementation activity in the countries that are relevant to their footprint. Businesses also should consider taking the opportunity to provide practical input on areas of particular concern through the consultation processes in the OECD and at the country level.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States)
  • Barbara Angus
  • Tobias Appl
  • Rebecca O Burch
  • Jose A (Jano) Bustos
  • Jeff R Levey
  • Mike McDonald
  • Sjaak de Pagter
  • Joshua Ruland
  • Jason Yen
Ernst & Young GmbH (Germany)
  • Christian Ehlermann

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.