TAX TAKE: Waiting on the World to Change – OECD's Outcome Statement and Next Steps for the Pillars
International tax continues to feature prominently on Congress's agenda this month. Across the Atlantic, the Organisation for Economic Cooperation and Development (OECD) issued an Outcome Statement that provides the status of and outlook for key components of both Pillar One and Pillar Two.
Issued last week, the Statement (endorsed by 138 of the 143 members of the Inclusive Framework (IF)) makes it clear that negotiators intend to press ahead with both Pillars, albeit on amended timelines. One key concession is the extended postponement (standstill) of any implementation of digital services taxes (DSTs) through the end of 2024, or until enough members ratify the multilateral convention (MLC), as long as at least 30 jurisdictions representing at least 60 percent of the entities that would be within scope of Amount A sign onto the MLC by the end of 2023. The MLC is still under construction, though the Statement notes the IF aims to have it completed and opened for signature by the end of 2023, with the plan for it to enter into force by 2025.
The Statement also highlighted that work on the subject to tax rule (STTR), a key component of the Pillar Two framework, has advanced significantly with the model provision and commentary expected to be released this week. The multilateral instrument (MLI) incorporating the STTR will open for signature on October 2, 2023. Also anticipated this week is the release of the next round of substantive rules around Pillar One's Amount B for consultation (comments from interested stakeholders are due September 1, 2023). The IF's stated intention is to conclude the Amount B work by the end of the year and incorporate any necessary amendments into the OECD's Transfer Pricing Guidelines by January 2024.
Canada was one of five IF members that declined to endorse the Statement (along with Pakistan, Belarus, the Russian Federation, and Sri Lanka), reiterating that its acquiescence to the parameters of the original standstill agreement was conditioned upon the MLC being implemented from January 1, 2024. As that deadline will clearly not be met, Canada has stated it will not delay the implementation of its own DST (which has been on the books since January 1, 2022) any further, with enforcement slated to begin January 1, 2024.
One interesting note around the continued standstill and the 30/60 threshold requirement for signatories onto the MLC by the end of 2023: it is generally understood that the U.S. must be one of these 30 jurisdictions, because getting to the 60 percent threshold of in-scope taxpayers would be impossible without it. Given the current climate, it is hard to imagine the U.S. offering anything other than a signature by the end of this year. Setting aside our recent history with ratifying treaties in general (the timeline is decidedly longer than six months) and our failure to implement other OECD multilateral tax conventions to which we are a signatory, there remain significant substantive issues with Amount A that have yet to be ironed out, suggesting this most recent timeline extension might not be the last. This raises the question of how much longer will it be before other countries take their cue from Canada and move ahead with their own DSTs even while keeping one foot in the ongoing Pillar One negotiations.
Whatever happens, the next six months will prove pivotal. We hear that top OECD officials will embark upon serious and sustained efforts to bring Congress along for the ride as we barrel toward the next deadline.
Tune in next week for our analysis of this week's Ways and Means Committee hearing addressing Pillar Two and recent legislative activity aimed at easing the tax burden for businesses with activities in the U.S. and Taiwan. #TaxTake
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