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Executive summary
On 12 July 2023, at the conclusion of the 15th meeting of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), the Organisation for Economic Co-operation and Development (OECD) released a statement (pdf) reflecting the agreement reached by 138 of the 1431 Inclusive Framework member jurisdictions on the remaining elements of their project on addressing the tax challenges of the digitalization of the economy (the BEPS 2.0 project).
The July 2023 statement summarizes the Inclusive Framework deliverables in four areas:
- The Multilateral Convention (MLC) on Amount A of Pillar One
- Amount B of Pillar One
- The Subject to Tax Rule (STTR) under Pillar Two
- Plan for implementation support
The July 2023 statement will be delivered to G20 Finance Ministers and Central Bank Governors at their meeting in Gandhinagar, India on 17-18 July.
Detailed discussion
Background
In October 2021, the OECD released a statement reflecting the high-level agreement of Inclusive Framework member jurisdictions on core design elements of Pillars One and Two of the BEPS 2.0 project.2 Since that agreement was reached, the Inclusive Framework has released a series of significant agreed documents on the global minimum tax under Pillar Two, including Model Global Anti-Base Erosion (GloBE) Rules, Commentary to the Model GloBE Rules, guidance on GloBE Safe Harbors and GloBE Administrative Guidance. The OECD also has released working drafts on the nexus and profit allocation rules under Pillar One, as well as on administrative aspects of Pillar Two, in the form of consultation documents. These working drafts did not yet reflect consensus agreement in the Inclusive Framework and were released to obtain input from stakeholders.
July 2023 statement
The July 2023 statement provides an update on the progress on the remaining work on Pillars One and Two. The statement has been agreed by 138 members of the Inclusive Framework on BEPS. Canada, Belarus, Russia, Pakistan and Sri Lanka are not included in the list of members that have approved the statement. However, Kenya and Nigeria, which did not join the October 2021 statement, are now part of this latest statement.
MLC on Amount A of Pillar One
The July 2023 statement indicates that the Inclusive Framework has developed a text of the MLC for Pillar One Amount A, setting out the substantive features necessary for it to be prepared for signature and including several provisions designed to address the particular circumstances of developing countries. The MLC will be accompanied by an Explanatory Statement setting out the common understanding. However, the statement indicates that a few jurisdictions have raised concerns about specific items in the MLC and efforts are underway to resolve these issues with the aim of preparing the MLC for signature expeditiously. According to the statement, the MLC will be opened for signature in the second half of 2023 and a signing ceremony will be arranged by year-end. The statement further references the objective of having the MLC enter into force in 2025.
The July 2023 statement also addresses the current standstill agreement on imposing newly enacted digital services taxes (DSTs) and similar measures, which runs through 31 December 2023. Under this statement, subject to the condition that at least 30 jurisdictions, representing a minimum of 60% of the Ultimate Parent Entities of in-scope Multinational Enterprises, sign the MLC before the end of 2023, Inclusive Framework members have agreed to refrain from imposing newly implemented DSTs or similar measures on any company during the period between 1 January 2024 and 31 December 2024 (or the date the MLC enters into force, if earlier). In addition, the statement indicates that if sufficient progress is made toward implementing the MLC by the end of 2024, Inclusive Framework members may agree to extend this deadline to the earlier of 31 December 2025 or the date the MLC enters into force.
Amount B of Pillar One
The July 2023 statement indicates that the Inclusive Framework recognizes that Amount B is a critical component of the broader agreement on Pillar One and therefore has reached consensus on many aspects of the Amount B framework. However, to ensure the appropriateness of the scope and pricing framework, further work will be undertaken on specific aspects:
- An appropriate balance between a quantitative and qualitative approach for identifying baseline distribution activities
- The appropriateness of the pricing framework, the application to wholesale distribution of digital goods, country uplifts within geographic markets, and the criteria for using a local database in certain jurisdictions
A public consultation on this further work on Amount B will be launched during the week of 17 July 2023, with comments to be submitted by 1 September 2023.
The July 2023 statement further indicates the intention that the Inclusive Framework will approve and publish a final Amount B report by year-end and that Amount B will be incorporated into the OECD Transfer Pricing Guidelines by January 2024. In this regard, consideration will be given to both the needs of low-capacity jurisdictions and the interdependence with the signing and entry into force of the MLC. According to the statement, the timeline implementing Amount B will take into account both these considerations and the time that some jurisdictions will need to adopt relevant legislative changes and businesses will need to prepare.
Part III — STTR under Pillar Two
The July 2023 statement indicates that the STTR is an integral part of the consensus on Pillar Two for developing countries in the Inclusive Framework. Work has been completed on an STTR model provision and commentary for incorporating it into bilateral tax treaties. The STTR will apply to intra-group interest, royalties and a defined set of other intra-group payments that includes all payments for intra-group services. The STTR is subject to certain exclusions and materiality and mark-up thresholds, and it will be administered through an ex-post annualized charge.
The July 2023 statement further indicates that work also has been completed on a Multilateral Instrument (MLI) together with an Explanatory Statement to facilitate implementation of the STTR, which will be open for signature from 2 October 2023. Inclusive Framework members can elect to implement the STTR by signing the MLI or bilaterally amending their tax treaties to include the STTR when asked to do so by developing countries that are members of the Inclusive Framework.
These agreed documents relating to the STTR will be published during the week of 17 July 2023.
Plan for implementation support
The July 2023 statement indicates that the Inclusive Framework has called upon the OECD Secretariat to prepare an action plan to support the coordinated implementation of Pillars One and Two. In particular, the plan should provide support and technical assistance to developing countries in coordination with relevant regional and international organizations.
Implications
The July 2023 statement reflects the progress made in the Inclusive Framework's work on Pillars One and Two. However, work is still ongoing in significant areas. It is important for companies to follow Inclusive Framework developments as they unfold in the coming weeks and months to evaluate the potential implications for their businesses. In addition, companies will need to monitor implementation activity in relevant countries. Companies may also want to take the opportunity to engage with policymakers as the work on design and implementation advances.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP (Netherlands)
- Ronald van den Brekel
- Maikel Evers
- Gerrit Groen
- Oana Popescu
- David Corredor Velásquez
- Roberto Aviles Gutierrez
Ernst & Young Limited (New Zealand)
- Matt Andrew
Ernst & Young LLP (United Kingdom)
- Joel Cooper
Ernst & Young LLP (United States)
- Barbara M. Angus
- Jose A. (Jano) Bustos
- Jeffrey M. Michalak
- Tracee Fultz
- Mike McDonald
- Joana Dermendjieva
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.
