The OECD has extended its deadline to complete pillar one in an outcome statement published today, June 12, after it was agreed by the Inclusive Framework organised as part of the BEPS project.
Mathias Cormann, secretary-general of the OECD, said that the reforms will provide stability for the international tax system.
“The agreement reached yesterday proves that despite the challenges and compromises along the way, multilateral dialogue works and can deliver results to tackle shared challenges requiring shared solutions,” said Cormann. “This work is critical to governments and our economies.”
However, the OECD has also extended the ban on digital services tax (DST) regimes until 2025, giving the talks more time to finalise the details of pillar one. As part of the agreement, 138 countries will not impose newly enacted DSTs before December 31 2024 – instead of a year earlier, on January 1 2024.
So far, the OECD has drafted the text of the Multilateral Convention (MLC) and member states are now considering the details, including new taxing rights under amount A of pillar one. Amount A would require governments to reallocate taxable residual profits of large companies to market jurisdictions where those companies operate.
The OECD has completed work on the subject-to-tax rule (STTR) and its implementation framework. The STTR would enable developing countries to update bilateral treaties to tax intra-group income, which would be implemented through a new Multilateral Instrument.
Meanwhile, the OECD is also working on the final details of amount B. This would simplify and streamline transfer pricing rules, especially the application of the arm’s-length principle to marketing and distribution functions.
All of this requires a comprehensive plan of action, according to the Inclusive Framework, which should include technical support for developing countries to implement the new agreement.
Waiting for the US
The OECD secured this statement in three days of talks with representatives of 138 countries in Paris, but there are still reasons to doubt the reforms will succeed.
Manal Corwin, director of the Centre for Tax Policy and Administration at the OECD, acknowledged speculation about US support.
“There’s been a lot of discussion and speculation about the prospects of ratification in the US,” Corwin told the Financial Times. “But that is the third milestone [after the MLC is finalised and signed] and our approach and our view is we need to get to the first two for that last one to be relevant.”
The new timeline may mean that the pillar one reforms will, if passed, be implemented after the US elections due in November 2024. A Democratic majority in the US Congress may be the key to securing pillar one’s success.
Even if President Joe Biden wins re-election, the Republicans could block international tax reforms in Congress.
In the meantime, the OECD cannot afford to wait for US lawmakers when negotiating the final details of pillar one.
What happens next
The next G20 summit will be held in September 2023, but G20 finance ministers will be meeting in India ahead of the conference next week on Monday, July 17, through Tuesday, July 18. High up on the agenda is the outcome statement on pillar one.
There may be a longer timeline for the two-pillar solution to be completed, but the MLC is still scheduled to be finalised in the next few months. The OECD intends to hold a signing ceremony before the end of 2023.
This will require a lot of work and more negotiation. However, the OECD has said it will publish STTR documentation next week with work on implementation set to be completed on October 2.
At the same time, the OECD is set to open a public consultation on amount B, until September 1. The Paris-based organisation aims to complete its work on amount B by the end of the year with a final report published by January 2024.
If everything goes to plan, the MLC will come into force in 2025 to allow enough time for each country to enact the required legislation.
