Tax News & Views International Weekly: OECD Implementation Assistance

As the Organization for Economic Cooperation and Development’s global minimum tax enters its first year of collection, most of the attention has been on Europe—especially as those countries struggle to implement the complex new regime.

But the organization also indicated in a recent report that support for the rest of the world, including cash-strapped developing countries, will be a key focus moving forward. Many of these countries only reluctantly went along with the minimum tax, also known as Pillar Two. And they’ve said the complex new rules are a major challenge for their tax administrations, which were often overwhelmed enforcing the international tax rules as they were previously.

In fact, many developing countries were so frustrated with the Pillar Two process, they helped start a controversial new effort at the United Nations to craft a competing tax regime, which could one day supersede the OECD system. While only a handful of countries opposed Pillar Two outright, many claimed they were at a technical disadvantage while participating in the Inclusive Framework, the 148-jurisdiction coalition which worked with the OECD on the project and approved the final package.

Poorer countries have also claimed that the regime’s preference for subsidies over credits puts them at a disadvantage in competition for investment—although the recent agreement on substance-based credits may soften that critique.

The OECD’s recent report said that the organization’s support for developing countries focused on tax incentives, as well as measuring the economic impact of the regime and how to develop the qualified domestic minimum top-up tax. The latter policy allows countries to tax local activity using Pillar Two’s definition of taxable income and capture that revenue before foreign countries can claim it under Pillar Two.

While many developing countries feel they have little to gain from Pillar Two once it’s in place, that’s still up for debate at this point. The 15% minimum tax, while allowing for some tax competition through credits, could still at least slow down the so-called race to the bottom, which forces countries to choose between investment and desperately needed tax revenue. And if it truly does reduce global profit-shifting, that will also provide smaller tax administrations with relief.

Noteworthy Items This Week

OECD Urges Patience After Rocky Start to Minimum Tax Filings – Saim Saeed, Bloomberg Tax ($):

Companies should give the OECD’s latest simplification measures time to work after a difficult first year of compliance with the global minimum tax rules, a senior OECD official said.

The minimum tax rules are “complicated. We get this. Totally true,” Achim Pross, deputy director for the OECD’s Centre for Tax Policy and Administration, said Friday at the International Tax Conference in Munich.

The rules oblige large multinationals to pay a 15% minimum corporate tax wherever they operate.

U.S. Isn’t Privileged With Side-by-Side Safe Harbor, Burch Says – Stephanie Soong, Tax Notes ($):

Rebecca Burch, Treasury deputy assistant secretary for international tax affairs, rejected the idea that the United States has a privileged position with the side-by-side safe harbor. “I take issue with that characterization,” Burch said. She spoke July 9 at a conference in Munich hosted by the International Chamber of Commerce, Business at OECD, and BusinessEurope.

The United States has been rigorously taxing foreign income under its international tax rules, including subpart F and the global intangible low-taxed income regime, according to Burch. It was the failure of the inclusive framework on base erosion and profit shifting to recognize the United States’ international tax system, and it was perhaps the United States’ failure to be clearer about its tax rules, she said.

“The U.S. did not get a privileged position in the side-by-side safe harbor,” Burch added. “It is finally removing tax friction and creating a level playing field, and that is it.”

US-Canada Stalemate Expected To Hold Amid USMCA Review – Dylan Moroses, Law360 Tax Authority ($):

The trade stalemate between the U.S. and Canada is likely to continue through a drawn-out review process for the U.S.-Mexico-Canada Agreement, though companies will benefit from an underlying level of stability as the deal remains in effect, trade lawyers said.

The joint review process for the USMCA formally kicked off last week as the U.S. announced its intent not to renew the agreement without changes. Jesse Goldman, a trade lawyer in Toronto with Osler Hoskin & Harcourt LLP, said the announcement "didn't come as a surprise."

In the context of the USMCA, Goldman said he views the relationship between the U.S. and Canada as having "less trade irritants" than the issues between the U.S. and Mexico.

UN Tackles Headwinds in Shaping Tech Transfer Pricing Guidance – James Munson, Bloomberg Tax ($):

Tech’s rapid evolution, reliance on intangible assets, and ability to spread operations across the globe have also sparked a demand among tax administrations for more guidance, tax practitioners said.

“This is something that would really help bridge the revenue gaps that we consistently continue to see,” Peter Ndirangu, who leads the mobile service support-payments team at the Kenya Revenue Authority, said, speaking in a personal capacity.

The UN tax experts committee decided this spring to write transfer pricing guidance for the information and communications technology sector after hearing submissions from states, business, and civil society groups on the committee’s new five-year mandate.

Mocking Up the Digital Services Tax War Games – Mindy Herzfeld, Tax Notes ($):

FIFA’s reversal of Folarin Balogun’s red card suspension at Trump’s request will undoubtedly further encourage other countries to take his DST warnings — and the risk they pose to cross-border trade — seriously. But given the on-again, off-again nature of Trump’s blustering, they still may decline to repeal their DSTs in response. They may also take note that some countries that pulled back from their DSTs in response to Trump’s threats later fared poorly in tariff negotiations.

Yet another wrinkle in the DST war games is the ongoing discussions at the OECD over its pillar 1 plans for taxing the digitalized economy, as well as negotiations at the U.N. on its framework convention for international tax cooperation — in which taxation of cross-border services is a key focus. Achieving a resolution of these matters through a multilateral process has long been linked with the withdrawal of DSTs. But that whole process remains up in the air.

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: Impossible Man

Debut Year: 1945

Debut Publication: Red Band Comics #3

Origin Story: An unimposing but smart Earthling who crash-landed his self-built rocket on the distant planet of Brutus, where everyone has superpowers.

Superpowers: Not only does Impossible Man not have any powers, but he's on a planet where that makes him hugely vulnerable. But he uses his quick wit and resourcefulness to defeat several superpowered antagonists, despite his limitations.

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.