The OECD/G20 two-pillar project on tax reform has gotten a boost from the Biden administration's renewed interest in the negotiations and proposals of the project, although these proposals have not been universally embraced. To recap briefly, Pillar I of the OECD/G20's inclusive framework would expand the existing nexus and profit allocation rules applicable to certain digital services and customer-facing businesses in order to increase the amount of income subject to tax in the jurisdictions where these businesses' customers are located. Pillar II would impose a “top-up” tax on the parent entity of a group to the extent that members of the group are not subject to a minimum rate of tax. This tax would be reinforced by rules affecting payments between related parties and by denying certain treaty benefits.
The Biden administration has dropped the Trump administration's position that Pillar I should be a “safe harbor” rather than a mandatory provision, and this reversal has been warmly received by the Biden administration's counterparts. Further, Treasury has proposed that Pillar I's scope be expanded from specific sectors to a “comprehensive scope,” which would capture the 100 largest multinational entities − measured by a combination of revenue and profit margin. Treasury has argued that this would simplify Pillar I and mitigate concerns that Pillar I would be prejudicial to U.S. firms. However, the proposal has been critiqued on the basis that it may exclude one of the original targets of Pillar I, Amazon, due to its unusually low profit margins, and that it would shift the focus away from technology companies that led to the creation of Pillar I. Another hurdle to reaching consensus on Pillar I is identifying the unilateral digital taxes that each jurisdiction must rescind, which is a key U.S. objective as these unilateral digital taxes impose significant tax and compliance burdens on U.S. firms.
The Biden administration proposes to satisfy its obligations under Pillar II through a reinforced tax on GILTI that would apply a minimum tax at a rate of 21%, imposed on a country-by-country basis and without the existing exemption of a 10% return on qualified business asset investment. The administration has also recently proposed (i) replacing BEAT with its Stopping Harmful Inversions and Ending Low-tax Developments (SHIELD) plan, which would be similar to the rules proposed under Pillar II for related party payments, and (ii) expanding existing U.S. anti-inversion rules. These proposals have been well-received by some in the EU. However, objections to a minimum tax of 21% on a country-by-country basis have been raised by lower-tax jurisdictions, such as Hungary and Ireland, whose consent would be required for EU legislation. A 21% minimum tax would be a significant increase from the 12.5% minimum tax previously proposed under Pillar II.
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