Procedural issues regarding Pillar Two

The translation into domestic law is aimed at achieving:

1. a domestic taxing right consistent with the design of Amount A; 2. relief of double taxation; 3. incorporation of procedures to administer the new rules and 4. processes to improve dispute resolution.

As existing tax treaties contain provisions that would generally prevent the application of Amount A, even after it has been implemented in domestic legislation, changes to public international law are also needed, likely through the development of a multilateral convention. A multilateral convention would need to contain the following elements:

1. removal of treaty barriers to determine a new

Amount A tax; 2. elimination of double taxation; 3. procedure for tax certainty regarding amount A and 4. other tax-certainty processes beyond Amount A.

Finally, in addition to the domestic and the public international law changes, guidance will be developed to secure coordinated implementation.

Focus on a consensus based and consistent solution

As the Inclusive Framework continues to work toward consensus agreement on Pillar Two, it is important to be clear what form that consensus will take. The expectation is that, in contrast to Pillar One, consensus on Pillar Two will not require a commitment by each country to fully implement the Pillar Two rules. Is Pillar Two to be done in the form of minimum standard? Alternatively, is it to be a recommendation or will it take some other form? Further on it is important to ensure that countries that choose to implement the Pillar Two rules do so in a manner that is consistent with the parameters of Pillar Two. Such consistency is essential to ensuring that the rules interlock in the intended manner and that the result of Pillar Two is not taxation in excess of the agreed minimum rate due to the imposition of multiple top-up taxes. The exigence of a harmonized approach stresses the tremendous amount of coordination that would be required both among entities in an MNE group and among tax authorities.

For Pillar Two the development of model legislation, standard documentation and guidance, designing a multilateral review process if necessary and exploring the use of a multilateral convention, which could include the key aspects of Pillar Two are conceived as crucial for the implementation. A Public Consultation Document on the Pillar Two Blueprint specifically requests stakeholder input on co-ordination mechanisms or other features of the GloBE that are worth exploring to ensure more tax certainty in applying the Pillar Two rules. It also recognizes the risk of double taxation and controversy resulting from the application the GloBE rules and, in the context of dispute prevention and resolution, requests stakeholder input on additional options to mitigate these risks.

Meaning of tax treaties

The Blueprint concludes that tax treaties should not present any obstacle to jurisdictions implementing an IIR and UTPR along the lines envisaged under the GloBE. It includes a number of references to the OECD Model Tax Convention and its commentaries, noting that, with limited exceptions, tax treaties are not intended to restrict a jurisdiction’s right to tax its own residents. For the IIR, reference is made to paragraph 81 of the Commentary to Article 1 of the OECD Model Tax Convention that states that “(…) controlled foreign company legislation structured in this way is not contrary to the provisions of the Convention.” The Blueprint regards the IIR as “similarly compatible with the provisions of tax treaties.” For the UTPR, the Blueprint

includes an analysis of OECD Model provisions and Commentary and comes to the conclusion that there is no conflict with the provisions on business profits (Article 7) and non-discrimination (Article 24).

In our view, the suggestion in the Blueprint that both the IIR and the UTPR do not conflict with existing tax treaties raises legal, policy and certainty concerns. In general, the analysis in the Blueprint seems to be based on the premise that ‘tax treaties are not intended to restrict a jurisdiction’s right to tax its own residents.’ However, as the OECD Model Commentary also acknowledges, the objective of most treaty provisions is to restrict the right of a state to tax residents of another state. The GloBE rules present an approach for domestic legislation that effectively taxes income from non-resident entities. This represents a shift in the allocation of taxing rights reflected in the treaty. It is also noted that the saving clause, included in the OECD Model Tax Convention in 2017, has not been widely adopted.

The analysis for the UTPR is particularly concerning as it is at odds with the current Commentary and undermines the arm’s length principle embodied in the existing treaty network. The points made in this regard in the Blueprint seem to be self-serving rather than analytical. The specific category of entertainment expenses is not comparable to the general scope of intra-group payments to which the UTPR will be linked. Deduction limits for entertainment expenses are generally used as a way to distinguish between commercial costs (deductible) and expenses that have a personal element (non-deductible). For that reason, entertainment expenses are non-deductible whether paid to an associated enterprise or a third-party. More fundamentally, the deductibility of expenses is “subject to the provisions of the Convention,” as specifically confirmed in the Commentary to Article 7 of OECD Model. We urge that the discussion in the Blueprint be reconsidered, particularly in light of an already emerging trend of undermining treaty obligations and denying access to MAP.

Implementation process

According to the blueprint outcome, the IIR and the UTPR do not require changes to bilateral treaties and can be implemented by way of changes to domestic law. Having mentioned the concerns above there are some doubts about this statement. On the contrary, the STTR and the SOR can only be implemented through changes to existing bilateral tax treaties. Their implementation could be fulfilled through bilateral negotiations and amendments to individual treaties or as part of multilateral convention. The MLI (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, BEPS Action 15) is conceived to offer a model for a coordinated and efficient approach to introducing these changes.

Even though the question of a required unitary implementation of the GLoBE rules is not fully answered, an orderly implementation process for Pillar Two should in any case be important. The Inclusive Framework should be involved in overseeing and monitoring all aspects of the implementation.

As in the case of Pillar One, the work of the Inclusive Framework also should continue beyond implementation in order to ensure that the new rules are being applied appropriately in practice and the dispute resolution processes are working effectively. This should include a peer review process, with a workable procedure for stakeholder input so that taxpayers can provide information on how the new rules are being applied in practice without fear of reprisal and with the expectation that any practices that are not consistent with the consensus agreement will be called out and addressed promptly and effectively. Finally, a schedule should be laid out for periodic review of the operation of the new rules together with a process for making any adjustments to the rules that are found to be needed during such review.