Implementation of Pillar 1 and 2 and BEPS

This article provides a snap shot of what has happened since the agreement reached on 8 October 2021 by 136 jurisdictions of the OECD/G20 Inclusive Framework.

Mauritania has joined as a member of the Inclusive Framework and agreed to the two-pillar approach, so at present we have 137 of 141 Inclusive Framework members in agreement on BEPS 2.0.  All OECD and G20 countries have now agreed to the two-pillar plan to reform rules of international taxation. The 137 jurisdictions together represent more than 90% of global GDP.  Four countries – Kenya, Nigeria, Pakistan and Sri Lanka have not yet joined the agreement and the OECD continues to work to bring them onboard.

Just a few days after the broad agreement was reached, the OECD published a 158 page report for the G20 Finance Ministers and Central Bank Governors. The G20 Report includes a two page "detailed implementation plan". In short, it is proposed that Pillar 1 will be introduced by way of multilateral convention (the MLC); whereas Pillar 2 will be implemented through domestic legislation based on OECD developed "model rules". The target deadline for introducing both measures is 2023. The OECD has itself recognised that this is an ambitious target.

In terms of Pillar 1, the first key milestone will be the publication of the MLC and an accompanying explanatory statement in early 2022. The MLC will be drafted in such a way that allows it to apply Pillar 1 between two jurisdictions irrespective of whether or not they have a bilateral agreement.  The MLC will trump existing (and future) tax treaties but only to the extent required to deal with the taxation of Amount A and related inconsistencies. This will leave the current tax treaty network to govern other aspects of international taxation. We will cover the features of the MLC in further detailed once the draft text is available. 

G20 support for BEPS 2.0 now seems unequivocal. At the conclusion of the recent G20 leaders meeting, held in Rome on 31 October 2021, the G20 leaders set out their commitment on various issues including international taxation. The G20 leaders endorsed BEPS 2.0, calling for its swift implementation and called on the Inclusive Framework to "swiftly develop the model rules and multilateral instruments as agreed in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023".

There have also been strong statements of commitment to BEPS 2.0 implementation from the EU. In October 2021, the EU Commission released a work programme for 2022. Unsurprisingly BEPS 2.0 is identified as a key initiative and priority with the Commission stating that it "will now strive to show the EU’s leadership in global tax fairness, by ensuring a swift and consistent implementation across the EU".

Benjamin Angel, the EU Commission's direct tax director, has expressed confidence that the 2023 implementation timeframe is achievable. He confirmed that the EU Commission plans to publish on 22 December 2021 the text of the draft directive that will require EU Member States to bring in Pillar 2 in domestic law. However, he clearly premised this ambition on the basis that the OECD model rules are released on time, something which is currently behind schedule. Mr Angel also noted that a proposal to make effective tax rates in the EU public would be published alongside the Pillar 2 directive.

The EU Commission will need to wait to see whether there is a need for a Pillar 1 directive given that the OECD agreement on this aspect may ultimately be binding on signatories. If required, Mr Angel indicated that a draft of the directive would not be available until Q3 of 2022 given that the OECD will not publish the first draft until early next year.

Irish Finance Minister, Paschal Donohoe, recently said that it is expected that next year's Irish finance bill will contain provisions implementing Pillar 2 into Irish law. The draft Finance Bill is usually released in draft in October so we are unlikely to see the draft Irish legislation until Q4 of next year. 

Shortly after agreement on BEPS 2.0, the OECD published the outcome of peer reviews on the inclusive framework member's compliance with country-by-country reporting requirements (CbC) and the operation of Mutual Agreement Procedures (MAP), both action points that are part of BEPS 1.0 (specifically (BEPS Actions 13 and 14 respectively). The OECD announced further progress on both fronts.

As at April 2020, 100 members had introduced CbC legislation covering practically all MNE groups that fall within the scope of the reporting regime. The OECD also highlighted that CbC is now covered in over 3,000 bilateral relationships.

On the MAP front, a number of peer review reports have been published and will continue to be published in batches. The OECD emphasized that seven jurisdictions which were identified as having issues with MAP (e.g. delays) in the first round of peer reviews, being Bulgaria, China, Hong Kong, Indonesia, Russia, Saudi Arabia and Brazil, have issued or updated their MAP guidance and have made progress toward implementing the recommendations that came out of the Stage 1 review. Five of the seven jurisdictions were reported to have bolstered resources or made organisational improvements in handling MAP. Four of the seven jurisdictions are reportedly now resolving MAP cases within 24 months.

In late November the OECD released MAP statistics for 2020 (covering 118 jurisdictions) together with the MAP Award winners for 2020. In 2020, there were 2,500 new MAP cases with a greater proportion concerning transfer pricing than in prior years (a trend that has continued since 2016). The cases are highly concentrated with 95% involving just 25 jurisdictions (95%). The key statistics can be found here. 

Transfer pricing cases take on average 35 months to resolve as compared with 18 months for other cases.  Switzerland and Australia won the MAP Award for fasted resolution of transfer pricing and other cases respectively. The award for the most improved jurisdiction went to Ireland.

For more information on this please contact Lisa Galpin, Philip McQueston or any member of A&L Goodbody's Tax team.

Date published: 7 December 2021