On December 20, 2022 the OECD opened a public consultation on the withdrawal of digital service taxes and other relevant similar measures under Pillar One and released an implementation package for Pillar Two. It should be noted however, that also the implementation package for Pillar Two that was released on December 20, 2022 contains 2 consultation documents. In total the OECD therefore released 3 consultation documents on December 20, 2022 and 1 guidance document.
The withdrawal of digital service taxes and other relevant similar measures under Pillar One
In this respect the OECD has released a consultation document titled: “Pillar One – Amount A: Draft Multilateral Convention Provisions on Digital Services Taxes and other Relevant Similar Measures”. The consultation document runs from December 20, 2022 until January 20, 2023.
The draft MLC provisions reflect the commitments with respect to the removal of all existing DSTs and other relevant similar measures and the standstill of such future measures. These commitments are an integral part of achieving Pillar One’s goal of stabilising the international tax architecture. Stakeholder input is sought on the technical design of these provisions.
implementation package for Pillar Two
In this respect the OECD has released the 2 consultation documents and a document that provides guidance on Safe Harbours and Penalty Relief.
The consultations
In this respect the OECD has released the following 2 consultation documents:
The consultation periods for both these consultations run from December 20, 2022 until February 3, 2023.
Pillar Two – GloBE Information Return
The Inclusive Framework seeks input from stakeholders on the amount and type of GloBE information that MNE Groups should be expected to collect, retain and report to a tax administration (whether through local filing or exchange of information). The Inclusive Framework welcomes input from stakeholders on how the data points, and explanatory guidance, could be modified based on the nature and structure of the MNE Group’s operations. Such modifications should nevertheless provide information on the tax calculations made by the MNE Group to allow tax administrations to evaluate the correctness of a Constituent Entity’s tax liability under the GloBE Rules and perform an appropriate risk assessment while avoiding the imposition of unnecessary information collection and computation requirements on MNE Groups.
Pillar Two – Tax Certainty for the GloBE Rules
The document outlines various mechanisms for achieving tax certainty under the GloBE Rules that are being explored by the Inclusive Framework on BEPS under the GloBE Implementation Framework. Those mechanisms could apply in advance of any taxation action being taken by jurisdictions (dispute prevention mechanisms) as well as mechanisms that could be relied upon once a taxation action has been taken (dispute resolution mechanisms).
In the document the International Framework has identified the following 3 Questions that stakeholders may wish to address:
- Have you identified possible scenarios where two (or more) jurisdictions implementing the GloBE Rules could interpret or apply the rules in a different manner, despite the Model GloBE Rules, Commentary, future agreed Administrative Guidance and the multilateral review process (qualified rule status)? If yes, could you describe such scenarios?
- Double taxation could arise when two implementing jurisdictions impose Top-up Tax with respect to the same item of GloBE Income because of different interpretations or applications of the GloBE Rules. Have you identified any instances where different interpretations or applications of the GloBE Rules should be addressed by a dispute resolution mechanism, even if the MNE Group has not suffered double taxation?
- Have you identified any other options that could be explored to achieve tax certainty for the GloBE Rules?
Guidance on Safe Harbours and Penalty Relief
Next to the consultation documents the implementation package also contains a document titled: “Safe Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar Two)”. This document provides guidance on Safe Harbours and Penalty Relief.
Building on the input from this public consultation, the Inclusive Framework has agreed on the design of a transitional safe harbour and a regulatory framework for the development of a potential permanent safe harbour as well as a common understanding for a transitional penalty relief regime.
The Transitional CbCR Safe Harbour described in Chapter 1 is designed as a short-term measure that would effectively exclude an MNE’s operations in certain lower-risk jurisdictions from the scope of GloBE in the initial years, thereby providing relief to MNEs in respect of their GloBE compliance obligations as they implement the rules. The safe harbour would allow an MNE to avoid undertaking detailed GloBE calculations in respect of a jurisdiction if it can demonstrate, based on its qualifying CbCR and financial accounting data, that in that jurisdiction it has revenue and income below the de minimis threshold (the de minimis test), an ETR that equals or exceeds an agreed rate (the ETR test), or no excess profits after excluding routine profits (the routine profits test). The Transitional CbCR Safe Harbour uses Revenue and Profit (Loss) before Income Tax from an MNE’s CbC Report and income tax expense from an MNE’s financial accounts (after eliminating taxes which are not Covered Taxes and Uncertain Tax Positions) to determine whether the MNE’s operations in a jurisdiction meet these tests. MNEs would still be required to perform a full Substance-based Income Exclusion (SBIE) calculation to meet the routine profits test.
Chapter 2 sets out a framework for the development of a permanent safe harbour that would reduce the number of computations and adjustments an MNE is required to make under the GloBE Rules or allow the MNE to undertake alternative calculations to demonstrate that no GloBE tax liability arises with respect to a jurisdiction. These Simplified Calculations Safe Harbours would permit the MNE to rely on simplified income, revenue, and tax calculations in determining whether it meets the de minimis, routine profits or ETR test under the GloBE Rules. The simplified calculations permitted under this safe harbour would be set out in Administrative Guidance as agreed and issued by the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) on an ongoing basis. Chapter 2 provides an example of a Simplified Calculations Safe Harbour that applies to the treatment of Non-Material Constituent Entities.
Chapter 3 describes the Transitional Penalty Relief Regime which is a common understanding that requires a jurisdiction to give careful consideration as to the appropriateness of applying penalties or sanctions where an MNE has taken reasonable measures to ensure the correct application of the GloBE Rules. The proposal is intended to provide a “soft-landing” in the introduction of the GloBE Rules, recognizing that MNEs are more likely to make mistakes in the initial years of the application of the rules.
The following chapters set out the criteria that Constituent Entities located in a jurisdiction must meet to be eligible for a GloBE Safe Harbour. Where the relevant tax administration of an implementing jurisdiction considers that there are specific facts and circumstances that may have materially affected the eligibility of the Constituent Entities for the safe harbour, it could challenge the eligibility of such Constituent Entities under Article 8.2.2. For example, the relevant tax administration may do so where it considers that the information reported in relation to the Transitional CbCR Safe Harbour does not accurately reflect the information in the MNE’s Qualified Financial Statements, and further guidance may be developed on the circumstances under which Article 8.2.2 (b) may be applied to ensure the reliability and consistency of the Qualified CbC Reports for purposes of that safe harbour.
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