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Implementing OECD’s Global Minimum Tax

By February 25, 2022No Comments

In late December, the OECD released model rules for the global minimum tax with a goal for implementation focusing on 2023. But, writes George Salis of Vertex, Inc., it’s not a sure thing—at least three critical contingencies stand as possible obstacles to implementation.

Reading the headlines, it looks like the OECD’s global minimum tax plan may be gaining steam. But while most member nations agreed to a broad, 15% global minimum tax rate, a lot needs to happen before a multinational tax treaty is signed and implementation begins.

From understanding how each country will implement the tax, to dealing with jurisdictions seeking exemptions and carve-outs, there are immense challenges to cover in a short period.

most recent development in the Organization for Economic Cooperation and Development’s plan came at the end of 2021. In late December, the OECD released model rules for the global minimum tax. The documents provided the scope of the tax plan and set out operative provisions and definitions meant to help governments integrate the rules into their own tax systems and, ultimately, pass domestic tax laws in 2022, with the OECD setting an implementation goal of 2023.

At least three critical contingencies must be managed while all of this is happening, and any one of these could become a major obstacle to implementation.

Playing Politics with Policy

Unfortunately, the debate around the OECD global minimum tax plan isn’t just about fiscal and economic policy. Politics plays a large role with just about every member country. Since legislation must be signed into law for every participating jurisdiction, that makes the plan just as susceptible to the geopolitical winds as any other measure.

In the U.S., that means President Joe Biden must first pass his Build Back Better legislation, which would bring U.S. tax law in line with the new OECD global minimum. That hasn’t proven to be an easy task. While the House has approved the bill, it has suffered a rougher fate in the Senate, where swing vote Democratic Sen. Joe Manchin (D-W.Va) has withheld support for the measure.

All the while, the EU is trying to move forward. Since tax bills require unanimous support from all 27 member countries, there is always a chance that former holdouts like Estonia could throw a wrench into the process. However, since all EU countries have shown support recently for the tax plan, the EU’s actions complement the OECD’s global plan. But lately, over the concerns of several countries (Bulgaria, Estonia, Malta and Sweden thus far)—France has been pressing the EU to enact its own minimum corporate tax rules, further complicating the much-needed international agreement and perhaps delaying the OECD deal.

Other wild cards include Kenya, Nigeria, Pakistan, and Sri Lanka—OECD members that haven’t yet agreed to join the global minimum tax plan.

Paths to Implementation

Beyond getting legislation approved in each OECD member country to codify the new policy, these nations must also set out plans for implementing the tax. With an OECD goal of 2023, that doesn’t leave much time, and some countries are blanching at the challenge.

The Finnish tax authority, in a letter to the European Commission, recently warned that the timetable would be challenging at best.

The U.K. isn’t wasting any time, though. On Jan. 11, the government opened a consultation on how it plans to implement and administer the 15% global minimum tax.

Consultation documents lay out how the U.K. will translate OECD provisions relating to the GloBE rules along with the calculation of effective tax rate and reporting and payment processes.

While they’re well on their way to effectively mapping implementation, the real work is just getting started. Any road map drawn up this early in the process will undoubtedly see revisions as comments from industry leaders and politicians begin to roll in.

It would be prudent for tax teams to keep an eye on how OECD member nations are hashing out their implementation plans as a way to track progress toward the 2023 goal.

Exemptions and Carve-Outs

The U.K. started pushing for an exemption last summer, even before the OECD plan was finalized and agreed up by member countries. It wants to exclude the city of London’s financial services companies from the global minimum tax rate. Some EU countries have expressed similar concerns about their banking industries.

This is just the beginning. Other countries have sought and will continue to seek exemptions. And sectors like banking, insurance, and extractive industries will push for carve-outs. The effect exemptions could have on the process would be detrimental to the point of diminishing the whole purpose of the OECD’s plan—fair tax competition. Further delays and carve-outs could still generate dissension among the ranks.

There’s a good chance enough will go right in the coming months that the OECD will pull off its global minimum tax plan, with implementation coming in 2023 or 2024. But it will not be an easy road for member countries, their respective legislatures, or the affected companies.

It will be crucial for tax departments to keep tabs on the progress of the three challenges outlined above and understand that, at this point, every deal and every date is a moving target.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

The above article was written and provided by George Salis from Vertex (Netherlands); contact: [email protected]