TAX TAKE: A Sea Change in OECD Revenue Estimates for Pillars One and Two
Last week, the Organization for Economic Cooperation and Development (OECD) released an updated revenue impact estimate of its two-pillar solution to reform jurisdictional taxing rights and establish new profit allocation rules (Pillar One) and implement a global minimum tax (Pillar Two). In October 2020, the OECD's first detailed estimate forecast additional annual revenues stemming from the implementation of Pillar Two to be roughly $150 billion. However, the latest estimate increases the original amount by almost 50 percent, suggesting that Pillar Two will raise $220 billion annually. Similarly, while the original estimate for Pillar One was $125 billion, the revised estimate is that $200 billion of profits will be reallocated annually. One might ask where those additional revenues are coming from, but to be fair, there is certainly more "meat on the bones" of the mechanical rules implementing both Pillars and the more detailed the rules are, the more accurate revenue estimates can be. The OECD acknowledges as much, citing the Amount A Progress Report and the Global Anti-Base Erosion (GloBE) Model Rules, along with "updated data," in reporting the higher estimated numbers.
The most advanced portion of the work is undoubtedly Pillar 2, with the EU, U.K., and South Korea (among others) having made significant strides toward enacting domestic rules in line with the GloBE Model Rules. As of now, U.S. multinationals know the global intangible low tax income (GILTI) and base-erosion anti-abuse tax (BEAT) provisions are not a compliant income inclusion rule (IIR) and undertaxed profit rule (UTPR), respectively. Forthcoming guidance from the OECD is expected to shed light on what GILTI is (e.g., a controlled foreign corporation (CFC) regime) and how it fits into the Pillar Two framework.
Dueling Democrat and Republican narratives on the sagacity, necessity, or efficacy of Pillar Two aside, it is clear that a not insignificant number of countries are planning to move forward. And if the U.S. does nothing, it appears that at some point in the future, U.S. multinationals may be subject to other countries' imposition of the UTPR, which will essentially result in other jurisdictions permissibly reaching into the U.S. fisc to extract tax revenues. Of course, we are in a divided Congress, one in which a Republican-led Committee on Ways and Means has shown little inclination to address the "OECD problem," so the prospects for immediate legislative fixes are dim.
While the current state might suggest that a "wait and see" approach is warranted, we at Tax Take don't share that view. At some point, we will need a fix for Pillar Two, and it will be a legislative one. And in the Pillar One context, Treasury officials are seeking input from the business community on various aspects of the framework. The next two years present the perfect opportunity to work with stakeholders to establish policy priorities, refine design features of viable legislative proposals, and determine how existing provisions might be impacted by any legislative proposals. #TaxTake
Upcoming Speaking Engagements and Events
Loren will moderate a panel titled, "The OECD & Global Tax Policy: What's Next?" at the DC Bar 2023 Tax Legislative and Regulatory Conference on January 26.
On February 10, Loren will speak at the ABA Section of Taxation 2023 Midyear Meeting in San Diego. She will participate in a panel discussion entitled, "Riding the ICAP and APA Wave."
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