Tax News & Views International Weekly: Rubber Hits the Road for Pillar Two

With less than a month to go before the first filing deadline for the Pillar Two 15% global minimum tax, the Organization for Economic Cooperation and Development released new guidance for the project, addressing technical issues with the filing system.

The new guidance comes after the organization announced a “common understanding” that companies could get some penalty relief if jurisdictions do not yet have the filing system fully online—so long as they file with another jurisdiction ready to receive the information return. That workaround, while welcomed by business organizations, has not answered all of the remaining concerns about whether the first year in the complex multilateral system will run smoothly.

This marks a key phase for the nearly decade-old initiative, when templates and requirements which were previously theoretical become an administrative reality. While it’s been long anticipated that compliance could be challenging for companies, that the participating countries and their tax authorities would not be able to fully follow the system was less expected. Developing nations have protested that the Pillar Two system could be a significant burden to their cash-strapped governments, but in this case it’s some of the European countries that were spearheading Pillar Two from the beginning. If they aren’t ready to follow it yet, it suggests that the challenges may be greater than anticipated.

This is also a key time for the operation of the Pillar Two regime’s many safe harbors, which taxpayers and governments are hoping can reduce a lot of the friction in the system. A transitional safe harbor, which allows companies to use information from pre-existing country-by-country reports, is set to expire at the end of the year.

Other permanent safe harbors, such as the one allowing for a simplified calculation of effective tax rates, could be crucial for American firms aiming to comply. While the side-by-side agreement exempts most U.S.-based companies from the key Pillar Two taxes, they are still subject to the domestic minimum top-up tax that countries can enact on local subsidiaries, as part of the Pillar Two system. Those remaining taxes are why U.S. companies must still pay attention to these implementation hiccups.

Noteworthy Items This Week

EU to Cut Tax Reporting for Big Multinationals in Overhaul – Saim Saeed, Bloomberg Tax:

The European Commission will propose exempting large multinationals subject to the EU’s 15% corporate minimum tax law from reporting on their cross-border tax arrangements.

The proposal is part of a comprehensive overhaul of the EU’s tax data sharing and reporting rules under the Directive on Administrative Cooperation in taxation, or DAC.

The measure is included “since (a) the 15% minimum taxation is expected to neutralize aggressive tax planning and (b) tax administrations already receive a considerable amount of information on these companies” via other reporting obligations, the commission said in a draft seen by Bloomberg, which could still be subject to change.

Multiple Groups Push for Rehearing in Economic Substance Case – Kristen Parillo, Tax Notes ($):

The Tenth Circuit majority’s failure to properly analyze the codified economic substance doctrine’s relevance requirement warrants rehearing, according to amici briefs filed by business and taxpayer groups.

In briefs backing Liberty Global Inc.’s June 5 petition for rehearing in Liberty Global Inc. v. United States, the groups argue that the panel majority’s April 21 decision failed to make a meaningful threshold relevancy determination as required by section 7701(o).

“Allowing the panel’s decision to stand will harm American businesses, which depend on clear and predictable tax rules to plan their operations,” the U.S. Chamber of Commerce and the American Fuel & Petrochemical Manufacturers wrote in their June 11 brief.

EU Reaches ‘General Approach’ on CBAM – Elodie Lamer and Sophie Petitjean, Tax Notes ($):

EU member states are ready to negotiate with the European Parliament on the proposal to extend the scope of the carbon border adjustment mechanism to downstream steel and aluminum products and to mitigate abuses.

As expected, the so-called general approach on proposed amendments to CBAM was reached during a June 12 meeting of the Economic and Financial Affairs Council in Luxembourg. EU Tax and Climate Commissioner Wopke Hoekstra told ministers that they made his proposal from last December better.

US Renewable Deals Hit Snags as Insurers, Banks Wait for Rules – Erin Schilling and Erin Slowery, Bloomberg Tax:

Foreign influence restrictions took effect this year for projects qualifying for the clean energy investment and production tax credits—also known as tech-neutral credits.

Tax credit buyers prefer to shop for projects under a previous tax credit regime because they’re not subject to the foreign influence restrictions. Developers had to start construction before the end of 2024 to qualify for the legacy clean energy tax credits.

“We’ve seen a premium for the legacy credits over the tech-neutral credits,” said David Burton, a Norton Rose Fulbright partner focused on tax deals in the energy industry.

See more about this subject here, or at Eide Bailly Energy Incentives.

4 Questions As Gov't Appeals Illegal Tariff Refund Suit – Dylan Moroses, Law360 Tax Authority ($):

The government's appeal of an order requiring immediate refunds for tariffs that were deemed illegal by the U.S. Supreme Court earlier this year is the latest obstacle for importers forced to stall investments in new products and brace for a longer wait for their refunds in response.

Trade lawyers told Law360 while there's a small chance the government may prevail, the appeal is frustrating from a practical perspective. For businesses, it will lead to new uncertainty and further financial strain as they continue to wait for refunds on duties paid under the International Emergency Economic Powers Act.

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: Atomic Rabbit

Debut Year: 1955

Debut Publication: Atomic Rabbit #1

Origin Story: None known.

Superpowers: When he eats special carrots, he gains super-strength and the ability to fly.

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.