Plenary session: government update

A session report from the IBA’s 24th Annual US and Europe Tax Practice Trends Conference in Munich

Friday 12 April 2024

Co-Chairs

Jeremiah Coder, Revenue Jersey, St Helier

Reto Heuberger, Homburger, Zürich

Speakers

Peter H Blessing, Internal Revenue Service, Washington, DC

Sandra Knaepen, Organisation for Economic Cooperation and Development, Centre for Tax Policy and Administration, Paris

Anna Manitara, European Commission, Brussels

Eva Oertel, Bavarian Ministry of Finance, Munich

Reporter

Mithuna Sivaraman, Skadden, Arps, Slate, Meagher & Flom, New York

Introduction

This government update explored the implementation of the Organisation for Economic Cooperation and Development’s (OECD) Two-Pillar Solution through several lenses, ranging from work currently being conducted by the OECD and the European Commission, to the country-specific perspectives of the Germany, Jersey, Switzerland and the United States. Several issues connected to the Two-Pillar Solution were discussed, including the administrative apparatus necessary for implementation, transfer pricing and tax dispute resolution, the treatment of remote working arrangements, tax incentives and transparency. The plenary session concluded with a discussion on tax morale and a summary of the legislative and policy developments across the organisations and jurisdictions represented by the panel. Overall, the panel underscored the importance of inclusive tax cooperation.

Jurisdiction-by-jurisdiction implementation of the OECD’s Global Anti-Base Erosion Model Rules (GLoBE or Pillar Two)

Germany

Eva Oertel noted that on 27 December 2023, Germany published in its Federal Law Gazette the Global Minimum Tax Act, which implements Pillar Two and the EU’s Minimum Tax Directive (Council Directive (EU) 2022/2523). Given that the OECD’s administrative guidance on Pillar Two was only published a few days prior, the Act as published does not yet take into account the OECD’s guidance regarding various safe harbours. However, the German government is currently working on an amendment to address the safe harbour guidance.

The European Union (EU)

Anna Manitara noted that the EU has been at the forefront of Pillar Two implementation, with EU’s Minimum Tax Directive (Council Directive (EU) 2022/2523) dating back to December 2022. Most EU Member States started implementing the EU Minimum Tax Directive from 1 January 2024 and those Member States that have experienced delays can implement the Directive retroactively. However, if a Member State does not implement the Directive retroactively, a fine can eventually be imposed as per the EU infringement procedures.

The Directive’s undertaxed profits rule (UTPR) will apply from 2025, in principle, while the country-by-country reporting (CbCR) and qualifying domestic minimum top-up tax (QDMTT) safe harbours will start applying from 2026.

The EU has yet to implement the OECD’s administrative guidance on Pillar Two published in December 2023 but is working on doing so. Manitara also noted that the European Commission is dedicating significant resources to canvassing EU Member State views on the implementation of the guidance and coordinating with the OECD to propose alternatives where issues arise.

Jersey

In May 2023, Jersey, the Isle of Man and Guernsey jointly announced their intention to implement an income inclusion rule and domestic minimum tax from 2025. Jeremiah Coder explained that Jersey is looking to consult on draft legislation by mid-summer 2024. This would be a standalone regime for in-scope entities requiring significant coordination, sitting outside of Jersey’s regular income tax system.

The OECD

Sandra Knaepen added further colour regarding the OECD’s Pillar Two guidance referenced by Oertel and Manitara. Knaepen explained that the CbCR safe harbour allows multinational enterprises (MNEs) to use some information directly available in their CbCR, obviating the need for detailed calculations. Meanwhile, guidance regarding the QDMTT has clarified that it is the source jurisdiction that has first right to impose the top-up tax. The guidance also addresses the calculation of the substance-based income exclusion and the allocation of taxes associated with US global intangible low-taxed income (GILTI) and foreign tax credit rules.

In 2024, the OECD plans to release further administrative guidance addressing the calculation of adjusted covered taxes in determining an MNE’s effective tax rate, the recapture of deferred tax liabilities, further anti-arbitrage rules and industry-specific guidance.

The US

Peter H Blessing expressed the US administration’s strong support for both OECD Pillars; it has included explicit Pillar Two language proposals in its ‘Green Book’. However, it will take a Bill and a willing Congress to push these proposals through, making implementation (as opposed to co-existence) difficult to achieve before at least 2025. Implementation of Pillar One also presents challenges, given that it requires Senate approval.

Blessing addressed the OECD’s administrative guidance, noting that GILTI even without change is a qualified controlled foreign corporation (CFC) regime under Pillar Two and that any tax under the GILTI would generally be pushed down and allocated to lower-taxed jurisdictions. The portion of US corporate alternative minimum tax imposed by reason of the income of CFCs arguably should be treated similarly, but there has not been an official determination made as yet.  

Blessing also mentioned that his office (IRS Chief Counsel) and the Office of Tax Policy are currently working on guidance to allow double taxation relief to the extent appropriate and on guidance regarding the avoidance of loss duplication.

The Two-Pillar Solution and its impact on tax administrations

The panellists identified two implementational challenges that tax administrations will face: upscaling technology and hiring and training the requisite staff.

National impact

Coder (Jersey) noted that the technology needed will take time to test and ensure fitness for purpose. Staff will also need to be trained to answer queries regarding Pillar Two. This was echoed by Oertel (Germany), Blessing (US) and Reto Heuberger (Switzerland), with Blessing pointing out that staff will need to be trained in financial statement review and in international accounting standards.

Blessing also raised the issue of decluttering the US tax regime, eg, whether the GILTI could be conform to Pillar Two, and whether the US Base Erosion and Anti-Abuse Tax could be replaced with the UTPR. He also noted that the US anticipates participating in the qualified status process and transitional qualified status process (peer review), which is important considering that the US foreign tax credit regime is sensitive to the legitimacy of foreign taxes paid in general.

Regional impact

Manitara explained that the EU’s challenge is to ensure that its Member States are not too far away from one another in regard to the digitalisation and automation of their administrative processes. To that end, the EU is currently pursuing two initiatives:

• VAT in the Digital Age (ViDA): three prongs to improve value-added tax (VAT) collection and tackle fraud, namely (1) digital reporting requirements, (2) involving electronic platforms in VAT collection, and (3) streamlining VAT registration across the EU; and
• Faster and Safer Relief of Excess Withholding Taxes (FASTER): making excess withholding tax relief procedures in the EU more efficient and more resilient to fraud through tools including an EU-wide digital tax resident certificate and automated data processes.

Knaepen echoed the need for coordination, stating that while some tools may need to be jurisdiction specific, the OECD’s Forum on Tax Administration and relevant working groups cooperate so that tax administrations learn from one another and do not reinvent the wheel.

Pillar One, transfer pricing and tax dispute resolution

Knaepen began with a summary of Mutual Agreement Procedure (MAP) inventory statistics. Towards the end of the plenary, she also flagged the OECD’s upcoming roundtable with businesses on improvements to tax certainty and added that the OECD’s Manual on Effective Mutual Agreement Procedures is currently being updated.

MAP inventories are growing steadily, with the cases opened outnumbering the cases closed. Italy leads in the transfer pricing inventory with over 700 cases, with Germany and France close behind. The US is in sixth place, with over 400 transfer pricing cases.

While the number of cases initiated has increased, they are also being resolved quickly. Regarding transfer pricing cases specifically, 61 per cent are being resolved with full agreement, while others are being resolved with partial agreement or through domestic remedies. Moreover, 14 per cent of transfer pricing cases are being withdrawn by the taxpayer, perhaps due to a greater use of audit settlements for transfer pricing matters. 

Across jurisdictions, competent authorities have noted that many of their cases concern marketing and distribution (M&D) transactions. Knaepen explained that Amount B of Pillar One would provide a simplified approach to applying the arm’s length principle to M&D transactions and would help tax administrations that do not have access to comparable data. Streamlining the approach to M&D transactions would also allow jurisdictions to focus on more high-risk transactions and on more complex MAP cases.

Blessing noted that the US administration is interested in the streamlined approach to limited risk distributors, and welcomes Amount B. He hoped that once countries participate in Pillar One, they will see the benefits of having a mandatory Amount B, which would simplify pricing and reduce disputes, as originally conceived. The extension to certain services, as well as goods, would also be desirable.

Treatment of remote working arrangements

Next, the plenary moved to a topic building off the earlier Workers Without Borders panel. Knaepen and Manitara noted that the OECD and EU are working alongside one another with respect to this issue.

Manitara explained that cross-border work is a reality across EU Member States. The issues raised by cross-border work became more evident during the Covid-19 pandemic, which served to accelerate the use of home offices and the relevant taxation challenges. She stressed that is important for the EU to ensure freedom of movement without additional tax burdens, and for tax and social security solutions to align. While the EU works to find more permanent solutions, a transitional solution could include a de minimis threshold whereby remote work up to a certain level would not trigger taxation in the Member State of residence.

Oertel expressed Germany’s support for the EU’s work, considering that Germany is surrounded by nine neighbours. While Germany has some bilateral agreements, Oertel echoed the need for a more holistic solution that would ideally align with social security.

Pillar Two and tax incentives

Knaepen acknowledged that when certain countries introduce minimum tax regimes they may also offer tax incentives alongside them. She noted that the OECD will monitor such incentives, since they may not qualify under the GLoBE’s coordinated framework, to ensure that an MNE pays top-up tax on its low-taxed profits in any jurisdiction. Overall, the GLoBE rules are meant to reduce pressure on governments to offer inefficient tax incentives, while still providing a carve-out for certain income that arises from real substance through the substance-based income exclusion.

Heuberger (Switzerland) and Coder (Jersey) both noted that in their respective jurisdictions, credits and subsidies have not been traditional tools to attract foreign direct investment and emphasised the need to maintain a competitive business environment. Coder said that he awaits additional OECD guidance to see how different regimes are evaluated, noting that evaluating incentives can be quite subjective.

From the US perspective, Blessing noted that certain US incentives, such as green credits that are ‘direct pay’ or are transferable, have been determined to be ‘qualified refundable tax credits’ under the GloBE rules. In addition, credits obtained in ‘tax equity’ financing structures can be ‘qualified flow-through tax benefits’ and may also qualify for favourable treatment under the GloBE rules. However, uncertainty still surrounds the US research and experimentation tax credit. Blessing expressed his hope that enough members of the common framework would have a shared interest in addressing such credits.

Tax transparency: initiatives and challenges

Knaepen addressed the OECD’s Crypto-Asset Reporting Framework (CARF) and amendments to the Common Reporting Standard, released in 2022. CARF provides for the reporting of tax information on crypto-asset transactions in a standardised manner, to automatically exchange information across jurisdictions annually. Over 50 jurisdictions have committed to CARF and the first information exchange is anticipated to occur in 2027.

To address interpretational questions regarding CARF, the OECD is working on a first set of FAQs and is addressing the application of CARF to decentralised crypto-asset platforms. The OECD also hopes to be able to release its CARF XML scheme and user guide in summer 2024.

Referencing the earlier Revisiting the Exchange of Information Provisions panel, Blessing noted that the US Corporate Transparency Act, providing for a US register for corporations and partnerships, has seen significant pushback by certain affected parties and court challenges. He also mentioned that his office and the Office of Tax Policy have issued proposed regulations regarding digital asset reporting for comment and are working on proposed regulations to be issued regarding CARF. Lastly, Blessing acknowledged European challenges to information exchange under the US Foreign Account Tax Compliance Act and the criticism of such challenges made in a March 2024 Tax Justice Network Report as (in its words) weaponising the privacy right to protect tax avoidance.

Conclusion: tax morale, and legislative and policy developments

To conclude, the panellists discussed the relationship between government and taxpayers, and taxpayer willingness to self-comply. Knaepen addressed the OECD’s report on this topic, entitled ‘Tax Morale II: Building Trust Between Tax Administration and Large Businesses’, noting that routine compliance is generally perceived as a global good. However, trust in MNEs drops when more complex requirements, such as information reporting, are considered. OECD regions perceive MNEs to be better behaved, but this is less the case in Asia; the perception drops further in Africa, Latin America and the Caribbean. The report identifies four ways to bolster trust: (1) cooperative compliance and risk-based approaches to audit; (2) mutual accountability between tax administrations and taxpayers; (3) transparency and communication; and (4) capacity building programmes, particularly within smaller jurisdictions.

Oertel echoed these points and pointed to Germany’s participation in the OECD’s International Compliance Assurance Programme and in other cooperative compliance programmes. Manitara noted that the EU recently completed its first pilot of a cooperative transfer pricing compliance programme and that a second pilot should be launched shortly.

Blessing pointed out that, as confirmed by feedback from US taxpayers, in light of the many unresolved questions in a complicated tax system, making the government view clear by providing formal or informal guidance facilitates compliance. In the latter category, his office periodically releases general advice on particular issues. For example, AM 2023-008, issued in December 2023, aligns with the OECD guidance that group membership and implicit support may be considered in determining arm’s length rates of interest based on realistic alternatives available to the borrowing affiliate. Rating agencies take into account the parent company rating, as well as additional factors, such as the importance of a subsidiary to the overall group.

Other US developments flagged by Blessing included focus by his office on the IRS Code Section 482 statutory authority with respect to a clear reflection of income and the application of the commensurate with income standard; just-issued regulations applying a one per cent excise tax on stock buy-backs; and pending final regulations with respect to an exception to the Foreign Investment in Real Property Tax Act for certain domestically-controlled real estate investment trusts (REITs) and regulated investment companies (RICs).

Lastly, Manitara addressed the December 2023 United Nations (UN) resolution 78/230 to promote inclusive tax cooperation. The EU’s view is that there is certainly more room for cooperation in the tax arena, but that such work should complement (and not challenge) the Two-Pillar Solution and other work carried out by the OECD. Furthermore, EU Member States should approach the UN resolution with one united voice.

Manitara also referred to the Tax Package adopted by the European Commission in summer 2023. The Commission adopted the Business in Europe: Framework for Taxation (BEFIT) proposal, which aims to simplify and streamline corporate taxation across the 27 EU Member States. The proposal includes a transfer pricing directive, addresses head office taxation for certain small and medium-sized enterprises (SMEs) and seeks to build upon the increased coordination of Member States owing to Pillar Two.