The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has made substantial progress in reforming the international tax system, according to the latest tax report by the OECD Secretary-General to G20 Finance Ministers and Central Bank Governors. This report highlights the historic milestone achieved by 138 countries and jurisdictions in reaching an Outcome Statement, summarizing the package of deliverables developed by the Inclusive Framework to address tax challenges arising from the digitalization of the economy. Let’s delve into the key developments and initiatives discussed in the report.
Reforming Transfer Pricing Rules:
One of the deliverables outlined in the Outcome Statement is the framework for the simplified and streamlined application of transfer pricing rules to specific marketing and distribution activities, known as Amount B of Pillar One. Stakeholders are invited to provide input through a public consultation until September 1, with the aim of finalizing the Amount B report by year-end and incorporating its key content into the OECD Transfer Pricing Guidelines by January 2024. This framework will contribute to ensuring a fairer distribution of profits among jurisdictions.
Addressing Taxation Challenges with MNEs:
The report emphasizes the importance of addressing tax challenges related to multinational enterprises (MNEs). Amount A of Pillar One includes the text of a Multilateral Convention (MLC) that enables jurisdictions to reallocate and exercise domestic taxing rights over a portion of MNE residual profits. The text of the MLC will be published once concerns raised by a few jurisdictions are resolved. This represents a significant step in ensuring a more equitable international tax system.
Supporting Developing Countries:
The report recognizes the importance of tax and development initiatives and highlights progress made in this area. The G20/OECD Roadmap on Developing Countries and International Taxation Update 2023 sets out indicative targets and specific initiatives planned to accelerate progress in areas identified by developing countries as key priorities. The OECD’s commitment to supporting developing countries in navigating international taxation challenges remains a crucial aspect of their work.
Advancing Tax Transparency:
The report showcases strong progress in advancing tax transparency. The Crypto-Asset Reporting Framework (CARF) and amended Common Reporting Standard (CRS) have undergone significant developments, with the OECD completing the technical work on the international exchange architecture for both frameworks. These efforts have led to the identification of additional revenues, amounting to nearly EUR 126 billion by governments, with over EUR 41 billion identified by developing countries. The increasing participation and information exchange among jurisdictions further enhance tax transparency.
Enhancing International Tax Transparency:
The report introduces new analysis on enhancing international tax transparency, particularly in the real estate sector. It explores the potential of automatic exchange of information for developing countries and highlights the facilitation of tax-treaty exchanged information for certain non-tax purposes, subject to applicable conditions. These initiatives aim to ensure greater transparency and accountability in global tax practices.
Pillar Two: Addressing Base Erosion and Profit Shifting:
Under Pillar Two, the Inclusive Framework has issued a package of documents, including the GloBE Information Return and administrative guidance. The GloBE Information Return streamlines reporting requirements and contributes to a centralized filing and exchange framework. The package also introduces two new safe harbors: a permanent safe harbor for jurisdictions implementing a Qualified Domestic Minimum Top-up Tax (QDMTT) and a transitional UTPR Safe Harbor providing relief from the application of the UTPR for specific fiscal years. Detailed administrative guidance on currency conversion rules, substance-based income exclusion, and tax credit treatment is also provided.
The OECD’s report to the G20 Finance Ministers and Central Bank Governors highlights the significant progress made in international tax reforms. The efforts of the Inclusive Framework and participating jurisdictions in reaching a historic milestone demonstrate the commitment to creating a fairer and more transparent international tax system. The reforms address key challenges, such as profit shifting and base erosion, and pave the way for a more equitable distribution of profits. As the implementation of these reforms continues, the OECD remains committed to supporting developing countries and advancing tax transparency globally.