Pillar One of the OECD’s global tax deal, which would redistribute taxing rights for a portion of the largest corporations’ profits to market jurisdictions, is unlikely to meet the planned 2023 implementation timeline, OECD Secretary-General Matthias Cormann admitted on 24 May 2022.
Speaking at the World Economic Forum meeting in Davos, Switzerland, Cormann said that he suspects that the Pillar One rules “most likely will end up with a practical implementation from 2024 onwards.” Under the OECD Inclusive Framework agreement reached in October 2021, the goal was to implement Pillar One beginning in 2023 – alongside the Pillar Two global minimum tax.
To achieve the scheduled 2023 implementation, the OECD had planned to finalise by the middle of 2022 the multilateral convention required to put Pillar One in place. Cormann acknowledged that this is unlikely at this point, noting that it “is now more likely to be by the end of this year.” Nonetheless, he added that the OECD is still hoping to reach an agreement in principle on remaining technical aspects before the G20 finance ministers meeting in July.
“There are still some difficult discussions underway in relation to some of the technical aspects [of Pillar One],” Corman explained.
The OECD’s work on the global minimum tax under Pillar Two of the agreement is in a different position. While efforts continue in various countries to adopt legislation implementing Pillar Two, Cormann indicated that the OECD has completed its technical work for this prong of the agreement. The OECD released model rules on Pillar Two in December 2021 and followed up with further commentary and examples in March 2022.
With respect to the technical aspects of Pillar One, the OECD has made some progress. In February, it issued draft model rules on “Amount A,” i.e., the share of a business’s residual profits that will be subject to the new taxing right created under Pillar One. Later the same month, the OECD released further draft model rules for tax base determinations under Amount A of Pillar One. However, both sets of draft model rules were open for comment for a short period after their release and are subject to change based on the comments received.
During an International Fiscal Association webinar held on the same day as Cormann’s comments, OECD tax director Pascal Saint-Amans referred to the public consultation on the Pillar One rules as a “cold shower” on the scoping rules, adding that the OECD is working hard on rethinking them. He further mentioned that certain building blocks of Pillar One have proven difficult, including the elimination of double tax, who pays Amount A and how to get to “Amount B.” Saint-Amans also reiterated Cormann’s comments regarding the OECD’s aim to reach broad agreement on the outstanding Pillar One issues in time for the 15-16 July G20 finance ministers meeting.
Although domestic legislative efforts are still ongoing in the EU, U.S. and other jurisdictions to implement the Pillar Two global minimum tax, multinationals should be preparing for the possibility of the adoption of the rules in at least some jurisdictions beginning in 2023. Even if only some jurisdictions adopt the minimum tax rules initially, this may put increased pressure on other jurisdictions to follow suit soon thereafter to avoid losing tax revenues to those that have adopted the tax.
On the other hand, the implementation of Pillar One’s new taxing allocation rules will require a multilateral convention, which the OECD has now acknowledged that it is likely months away from finalizing. Since the convention will then have to be adopted by various countries to take effect, it is reasonable to conclude that implementation of Pillar One will likely be pushed until at least 2024. The delay in Pillar One implementation – while not unexpected, given the outstanding technical work – could have broader international tax implications. It could potentially affect Pillar Two implementation in places such as the EU where some jurisdictions have expressed reticence to adopt one pillar without the other.
In addition, delays in the implementation of Pillar One – which has been tied to the removal of individual country’s digital services taxes – may not only result in the perpetuation of existing digital services taxes but could also open the door for new implementation of such measures. Members of the European Parliament emphasised this in a recent meeting with US legislators. According to a 25 May press release, the European delegation “made clear that if Pillar One is off the table, digital services taxes are back on the table.”