Tax News & Views International Weekly: More Developments as Pillar Two Filing Deadline Nears

Many business groups have raised concerns that countries participating in the Organization for Economic Cooperation and Development’s Pillar Two 15% global minimum tax may not have their systems fully enacted—and may not have outlined all of their local documentation requirements—before the first filing deadline this summer.

Responding to those questions, OECD officials announced last week a “common understanding” between implementing jurisdictions to waive penalties “to the extent available under their respective domestic laws,” so long as the taxpayer has filed the required information return in any country that has the system up and running. As outlined further in a Monday release, thirty-three jurisdictions have confirmed that they will be fully implemented by June 30, when the first returns for the 2024 fiscal year will be due.

Under Pillar Two, countries are expected to exchange the “global information returns” required for compliance with the minimum tax. However, individual countries may have different requirements, leading to concerns that taxpayers will need to file several bespoke returns, increasing the administrative costs.

Business at OECD, the primary business association following implementation of Pillar Two, praised the announcement as necessary relief. Nevertheless, practitioners have still expressed concerns about how this new agreement will work in practice.

Perhaps most pressing to taxpayers is the question, how far countries will be able to go to waive penalties, “to the extent available” under domestic law? In most of these cases, these penalties are enacted into the countries’ tax codes—how much flexibility will they have?

Four countries—The Bahamas, North Macedonia, Slovak Republic and Vietnam—have not joined the “common understanding,” and Business at OECD said they were concerned about a “patchwork” approach. Some companies may also not be present in the 33 jurisdictions currently able to accept returns.

In many ways, this latest development highlights the strengths and potential challenges of the Pillar Two design. While it is based solely on national laws and enforcement by the implementing countries, through a coordinated approach it can adapt as the situation changes and rely on all of the available expertise. On the other hand, any jurisdiction’s problems with carrying out the new requirements can cause system-wide problems.

Pillar Two applies to multinational companies with at least 750 million euros in annual revenue. As the U.S. is largely exempted through a “side-by-side” agreement announced earlier this year, it is not accepting Pillar Two returns and won’t be participating in the “common understanding.”

Noteworthy Items This Week

As Australia Wields Its Tax Muscle, Multinationals Squirm – Caleb Harshberger, Lauren Vella and Deborah Nesbitt, Bloomberg Tax ($):

The ongoing gripe is about the ATO’s strict enforcement of the nation’s 30% corporate tax rate—among the highest in developed nations—and its aggressive interpretation of tax codes and even judicial rulings. But things could soon get much more interesting.

Later this year, the ATO plans to publicize multinationals’ reports on how much they are paying in taxes in each jurisdiction where they operate, along with a trove of data that could strip bare closely held financial information of the biggest companies operating on the continent. That full-public-disclosure feature in Australia’s “country-by-country” reporting plan would be an outlier among major world economies.

The US Chamber of Commerce wants the Trump administration to step in. And some major corporations are even threatening to stop doing business in Australia.

U.N. Tax Convention Could Still Include Treaty Renegotiation – Sarah Paez, Tax Notes ($):

A U.N. framework convention on international tax cooperation could still require participating countries to renegotiate existing tax treaties despite protests from several countries opposed to reopening existing treaties.

A partial draft of the U.N. tax convention, dated May 18 and seen by Tax Notes, says that for countries to fulfill their obligations under the convention, they may need to interpret, apply, and where necessary, renegotiate existing tax treaties and related agreements.

When the U.N. committee that negotiates the tax convention last met in February, several countries raised concerns with language in another part of the convention that proposed renegotiation of existing tax agreements that are inconsistent with the principles of fair allocation of taxing rights. Germany, India, Norway, and Sweden were among the countries voicing objections.

Shakira’s Spain Tax Win Shows ‘Whenever, Wherever,’ Proof Counts – Xavier Segui (NAX Law), Bloomberg Tax:

Shakira’s victory against the Spanish tax authorities reminds us of an essential truth—tax residency ultimately depends not on formal declarations, but on facts and documents capable of withstanding scrutiny.

Spain’s National Court ruled on May 18 that the pop star wasn’t a tax resident in Spain in 2011, annulling approximately 54 million euros ($69.7 million) in tax assessments and penalties and ordering her to be paid 60 million euros, including interest.

The case revolved around a simple but deceivingly complex question: When did Shakira become a tax resident in Spain?

Swiss Minimum Tax Faces Competitiveness Risks, Study Says – Stephanie Soong, Tax Notes ($):

Switzerland’s minimum tax regime may no longer be fit for purpose in a changing global tax landscape and should be abolished before it damages the country’s competitiveness, according to a new study.

The May 18 study, prepared by the Institute of Law and Economics at the University of St. Gallen, recommended that Switzerland repeal its OECD-aligned income inclusion rule and qualified domestic minimum top-up tax (QDMTT) as early as 2026.

The country could then replace the regime with a separate domestic minimum top-up tax introduced through its corporate tax law that would produce a tax burden comparable to that of a QDMTT, according to the study.

Marlene Nembhard Parker: A Tax Diplomat and Dissenter – Nana Ama Sarfo, Tax Notes ($):

For Nembhard Parker, the struggles that island states are facing as tropical storms become more violent has only reinforced her belief that tax multilateralism cannot leave any countries behind. It must be adaptable enough to address the crises that countries are facing across all spectrums.

Meanwhile, that same multilateralism is both working and being tested at the OECD’s inclusive framework, where delegates are wrangling with pillar 1’s uncertain future and the question of whether a recent side-by-side arrangement allowing United States-headquartered multinationals to be excluded from parts of pillar 2 will invite similar deals and begin to unspool the foundation of the global minimum tax.

In challenging moments like these, it’s easy to dismiss tax multilateralism and declare that it is becoming irrelevant. But Nembhard Parker, who is at the front table of these deliberations, is adamant that the case for multilateralism remains strong. If anything, she argues, it is moments like these in which multilateralism can earn its legitimacy by helping countries respond to crises and exercise their voices.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Jack Victory

Debut Year:1945

Debut Publication: Weekender #2

Origin Story: Unknown--he never appeared in any comics, only on the cover of a publication of reprints. Fans came up with the "Jack Victory" name decades later.

Superpowers: Also unknown, but his Union Jack skin-tight suit and bell-bottoms, as well as his "V" belt buckle, appear to give him super-strength. Note that he debuted in 1945, when the U.K. celebrated "V-E" day 81 years ago this month..

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.