OECD revises digital tax proposals

Tax Hot Topics newsletter The Organization for Economic Co-operation and Development (OECD) has released a new tax proposal, the Global Anti-Base Erosion (GloBE proposal), which is similar to the United States’ Global Intangible Low-Taxed Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT) regimes.

The proposal is part of an effort to address tax challenges of digitization under two “pillars,” on focusing on allocations (pillar one) and the rest on the remaining BEPS issues (pillar two). The GLoBE proposal more specifically continues the May 31, 2019, Programme of Work for Addressing the Challenges of Digitization of the Economy (Programme of Work) under pillar two. The aim of the proposals is to develop a harmonized, global set of rules to address risks from structures that allow multinational enterprise (MNE) to transfer profits to jurisdictions where they are subject to no or very low taxation.

In general, the GloBE proposal appears to be heavily focused on the income inclusion rule, and describes broad principles on how the income inclusion rule might operate. Specifically, if implemented, the income inclusion rule would tax income that was subject to tax at an effective rate below a minimum rate. Notwithstanding the focus on the income inclusion rule, the original Programme of Work includes four components:

  • An undertaxed payments rule that would deny a deduction or impose a source-based tax (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate
  • A switch-over rule to be introduced into tax treaties to allow a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a PE or derived from immovable property are subject to an effective rate below the minimum rate
  • A subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate
  • The income inclusion rule described above

The consultation paper highlights design concerns with respect to certain technical aspects of pillar two and seeks comments from stakeholders. Specifically, the consultation document seeks comments on three technical areas of the GloBE proposal:

  • The use of financial accounts as a starting point for determining the tax base
  • The extent to which a MNE can combine income and taxes from different sources in determining the effective (blended) tax rate on such income
  • Experience and views of stakeholders on carve-outs and thresholds that may be considered as part of the GloBE proposal

The OECD requests comments by Dec. 2, 2019, and expects that these comments will assist in advancing of a solution for addressing these concerns in its final report to the G20 in 2020.

David Sites
Washington National Tax Office
T +1 202 861 4104

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.