OECD Inclusive Framework Agreement reached on BEPS 2.0
There has been a further breakthrough in the process to reach international agreement on the BEPS 2.0 proposals, aimed at addressing the tax challenges arising from the digitalisation of the economy. The 30 June - 1 July meeting of the 139 country OECD Inclusive Framework concluded with agreement from 130 countries on the proposed two pillar approach. While Ireland did not sign the agreement, notably the signatories include all of the G20 countries. It is now highly likely that that the two pillar approach will be agreed by the G20 finance ministers at their meeting on 9 and 10 July 2021.
The ambitious timetable for progress on BEPS 2.0 continues with the Inclusive Framework looking to have a detailed implementation plan in place, and finalisation of remaining issues, by October of this year. The expressed aim is for a multilateral instrument through which Pillar 1 will be implemented to be developed and opened for signature in 2022, with Pillar 1 coming into effect in 2023. The implementation plan will contemplate that Pillar 2 should be brought into law in 2022, to be effective in 2023.
The OECD statement released concerning the agreed solution refers to multinational groups with more than €20bn in revenues and a profit margin above 10% coming within scope of Pillar 1. A portion of the profits of a group coming within scope would be taxed in jurisdictions where they have sales; between 20% and 30% of profits above a 10% margin may be taxed. A review is to be undertaken seven years after implementation, the outcome of which may result in a reduction of the €20bn threshold to €10bn.
Groups in the extractives sector (such as oil, gas, and mining) and regulated financial services sector will be excluded from the scope of Pillar 1. The OECD statement does not provide any new details on "Amount B” of Pillar 1, the a simpler method for groups to calculate the taxes they owe on foreign operations such as marketing and distribution.
Concerning Pillar 2 and the global minimum tax, the statement refers to groups with more than €750m in revenue coming within scope. The minimum rate of tax to be used under the Pillar 2 rules "will be at least 15%", according to the statement. International shipping is to be excluded from the scope of Pillar 2.
Ireland, along with low tax EU Member States Estonia and Hungary, are among the nine countries of the Inclusive Framework that did not sign the agreement on the two pillar proposals. Another EU Member State, Cyprus, is not part of the Inclusive Framework and has stated its opposition to the two pillar approach and any implementation by EU directive when the proposals are finally agreed.
The Irish Finance Minister, Paschal Donohue, at a press conference following the announcement of the OECD agreement, indicated his reservations about the minimum 15% tax rate. However, he indicated that he could support many other elements of the two pillar proposal. Despite Ireland's refusal to agree with the 130 other countries, the Minister said that he is absolutely committed to global tax reform, that Ireland will continue to negotiate and engage in good faith and that he is going to make the case for the Irish 12.5% corporation tax rate. He did not say what changes to the proposals would be necessary in order for Ireland to agree to the proposals.
Regardless of what Irish political party has held power in recent years, Irish administrations have consistently mounted a stout defence of Ireland's 12.5% rate. Referencing the retention of the rate has become a type of mantra for Irish finance ministers, with particular strong statements made when Ireland came under severe pressure from some EU Member States to increase the rate during the economic crisis and consequent IMF led bail-out of Ireland. The 12.5% rate is seen as a cornerstone of Ireland's attractive package for foreign direct investment, although it cannot of itself explain the enormous success the country has had in attracting foreign investment. Given the sustained cross-party support for the 12.5% rate, any change to it should be politically sensitive in Ireland. It is unsurprising therefore that Paschal Donohue announced a public consultation on the matter. Given the tight timeframe for further progress at international level, it should be expected that any Irish consultation process will need to be undertaken quickly.
While the Irish Minister for Finance may seek to press for changes to Pillar 2 during the technical discussions over the coming weeks, following the Inclusive Framework agreement this week, the direction of momentum is very much towards international agreement in principle on the two pillar proposals being reached shortly.
For more information on this please contact Philip McQueston or any member of A&L Goodbody's Tax team.
Date published: 2 July 2021