Tax Section Odyssey Global Tax Trends: What CPAs Need to Know Now
This Tax Section Odyssey podcast episode takes a deeper dive into the Organisation for Economic Co-operation and Development's (OECD) initiative on Base Erosion Profit Sharing (BEPS) 2.0 which sets to reform the internation tax system with Pillar 1 and 2 tax regimes. In addition to the complexity of such international regulations, the political landscape for U.S. implementation is uncertain, and potential action is needed from Congress.
Cory Perry, Principal, National Tax — Grant Thorton Advisors, and Vice Chair of the AICPA's International Technical Resource Panel (TRP), highlights that while many U.S. companies may not face larger tax bills if these regimes are adopted in the U.S., the administrative and compliance challenges are significant. The AICPA has submitted comment letters to the OECD, Treasury, and the IRS, focusing on simplification and clarification of rules.
AICPA resources
OECD BEPS 2.0 - Pillar One and Pillar Two — The OECD BEPS 2.0 sets out to provide a tax reform framework allowing for more transparency in the global tax environment.
Advocacy
Comments to Treasury on tax issues of OECD Pillar Two, Feb. 14, 2024
Comments to Treasury on Amount B of OECD Pillar One, Dec. 12, 2023
Other resources
OECD BEPS — Inclusive Framework on Base Erosion and Profit Sharing
Transcript
April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the tax section and I'm here today with my colleagues Reema Patel and Lauren Pfingstag. They are colleagues here with me at the AICPA. They are international experts and legislative experts. We'll get into more of that as we're discussing.
I'm also delighted to have with me Cory Perry. Cory is a principal with Grant Thornton Advisors and their national tax office. He's also, and more importantly for our discussion today but probably not more importantly for his day-to-day, the Vice Chair of the AICPA's International Tax Resource panel and Chair of the OECD taskforce. That's what we're going to be talking about today.
If you are a follower and listener of this podcast, you might recall a few episodes ago we did a higher-level background on OECD's tax regimes — Pillar 1 and Pillar 2 — just laying the groundwork. Today we're going to talk more about why we think you need to be familiar with these concepts. Even though for today they may not be relevant for any of your current clients.
We're also going to delve into the political landscape and where we are today and what that could mean for the US tax system related to international tax legislation. Reema, I'm going to let you take it away for the next little bit.
Reema Patel: Thanks, April, Cory, welcome. I know a lot of us have been hearing about the OECD Pillar 1 and Pillar 2 for awhile now. Many countries have also implemented it this year and some are implementing it next year. I guess the most basic question we can start with is, who should care and pay attention to this?
Cory Perry: Absolutely. It's a wide impact in tax, but it only impacts the largest of the large companies. I would say it has a high threshold, 750 million of consolidated revenue and two of the four preceding years and you have to be taxed, want more than one jurisdiction. We are talking about very large companies but these days, even middle market companies are easily starting to bump up against that threshold. We're not just talking about the Fortune 100. We're talking about middle market and above companies that should care and think about these rules.
Obviously accountants that serve those types of companies, those larger companies. I think many of those companies themselves not even be fully aware that they're subject to these rules or may not have fully thought through how they're going to comply. The other thing I would add, there is a bit of a misconception out there that this is a corporate multinational problem. Although that is primarily where it is, it also impacts pass-throughs, partnerships and S corps that are parents within these groups can be equally subject to these rules.
Rules don't always necessarily apply at that level, but they are applied to the group as a whole. I know there's a number of practitioners out there that have clients that have grown over time and might have reached this level. It's by no means going to be the majority, certainly going to be a large minority, but I suspect many will have clients out there that might be impacted or if you're in-house at your company might be impacted.
Reema Patel: Like you said, it is for large corporations currently with consolidated revenues at 750 million euros and more. What are you seeing with the clients right now? Any challenges that they're being faced by technology? Gathering data points? I know you have to comply with many foreign jurisdictions as well as the US. Can you speak a little bit to the challenges that you're seeing just as a practitioner as well as from a client perspective as well for them.
Cory Perry: Absolutely. Companies are really still trying to get their hands around this as are practitioners. Even the rules aren't fully baked. The OECD is still releasing new guidance every couple of months on quite a frequent cadence. So the rules continue to evolve and how companies are approaching it continue to evolve as well. As far as challenges, interestingly enough, from what we're seeing, many companies are not actually seeing larger tax bills.
You'd think tax legislation, tax change like this is going to hit the bottom line and there are certainly companies out there with lower/no taxed pockets of income or that are in low-tax jurisdictions. But what I've found is the vast majority, particularly of middle market companies, are generally not in many of these low-tax jurisdictions, if at all. They are in higher tax jurisdictions, think of the US's top five trading partners- for example, Canada, Mexico, China, and Japan and the UK all have rates above or even some cases well above 15%.
The idea is to reach a minimum level of 15% and once you're above that, there may not be additional top-up tax to be paid. It may not be necessarily for all taxpayers an item that's going to really be a cash tax impact. But where we're really seeing the challenge is more on the administrative and compliance side to this.
It is a very significant undertaking to comply with these rules. It's just a massive effort that's required in order to get your hands around what needs to be done, get your systems updated so that you can comply and collect the information or the data at the right level, clean the data, so on and so forth. There was a lot of complex calculations that need to be done. In some cases there may be even third or four sets of books that need to be kept that you may not have been keeping our tracking in the past.
The rule started out with a simple premise. It was going to be a book tax based on books. That sounds simple. But it quickly evolved into a very complex tax regimes that sits on top of all the other global tax regimes that are already in place. If it wasn't complicated enough before, now we have another layer over the top making it quite complex. That's certainly been the biggest challenge is how do you deal with all of this change and international tax complexity when you're operating across borders.
Reema Patel: Definitely, I guess it just keeps piling all the time. Three sets of books, four sets of books. We don't even have CAMTI [rules] out yet. Speaking of which currently, it looks like, as we mentioned it's for large corporations, but what do smaller firms and CPAs in the industry need to know? I'm sure they're not getting into the nitty-gritty details of how to calculate pillar two taxes and all the top up taxes on different regimes.
But we don't know if the threshold does get lowered, more companies will get pulled in, possibly. What should they know? How can they keep up with and at least be aware that it's out there?
Cory Perry: I think at this point I would say it's more of a client service point. It's being aware of the potential risks in an area where your client might be subject to these rules. I don't expect many firms will have many clients that are going to be impacted. In fact, many firms might not have any clients that are impacted. But it's making that identification and helping those clients understand whether they are impacted. It is getting a lot of press and it's in the Wall Street Journal, it's on NPR in the morning, it's certainly in the mainstream news.
Clients are interested in asking questions about it. It's understanding that it's out there, what it is and who it applies to. I think that's the most important part, I don't expect most smaller firms will scale up or hire experts in this area necessarily. But I think helping those clients with the identification - that's going to be greatly appreciated. You're highlighting a risk area for them that they might not have previously considered. Then helping them find a resource that can assist with this somewhat unique area of tax.
Whether that'd be another CPA firm in the US or more commonly, sometimes these are non-US firms because right now, as we'll talk about later, the US is not implemented these rules that could certainly assist. Again, flagging these as issues, being aware of those thresholds and who it might apply to is probably the area I would focus right now and making sure that your base has been reviewed. And they understand whether they're going to be in or out these rules.
Reema Patel: Definitely. I guess just building on what you said. It's been in the news everywhere. We've also heard in the news — What's the U.S going to do? The US hasn't implemented or enacted any part of pillar two regime yet. Until they do or they don't, the U.S. multinationals are going to have to comply with this. They have to comply in the foreign jurisdictions. They have to comply in the U.S. as well. But there has been limited guidance issued. [There was] a notice earlier in the year, and then the recent proposed regs on dual consolidated losses.
But none of them really went into detail. It was just like scratching the surface. There's a lot of guidance that the U.S. taxpayers need. I know the AICPA's submitted a few comment letters to the OECD, to Treasury and the IRS, and you've been heavily involved in some of them. Do you want to just speak to a little bit on what we highlighted in the comment letters, some of the recommendations and concerns we raised in hoping for some future guidance.
Cory Perry: Sure. You made a good point there with scratching the surface. I think there's a lot of ground yet to be covered by the IRS. As I said earlier, this is a complex system that lays on top of a complex system. The US [tax] system is undoubtedly the most complex tax system out there. There are a number of different interesting and intricate ways in which these two systems interact. The IRS is working diligently, but I think [they are] only beginning to understand where some of these issues and gaps might be in regulation.
They're trying to hit the bigger ones first which they've done with then notice package and the regulations. The notice addressed primarily, but not exclusively, foreign tax credit issues and how the US is going to view these new taxes, really novel taxes that have been created under this Pillar 2 system. And how that's going to interact with the US foreign tax credit system. Then just a week and a half or two weeks ago, they also released proposed regulations dealing with a number of dual consolidated loss issues. One of the major issues they addressed was the Pillar 2 area. The dual controlidated loss rules, those very complex rules, but suffice it to say they are rules that are intended to address double-dipping of losses between two systems.
Really, now that we have this overlay, we have this third system that you have to contend with where losses can be used in the U.S. and in that third system and that makes that already challenging system quite complex. I would say a detailed discussion of our comment letters is probably a little bit weedy for this discussion but I'll give some themes and some areas that we focused on in those comment letters. The first I would say is a call for simplification. That was really our focus with most of our efforts in this space. We asked for exceptions and safe harbors from application of some of these very onerous rules.
We focused on areas where there wasn't much opportunity for abuse but there was a lot of opportunity to save taxpayer's and CPAs time and effort to have to do some of these calculations that might be, in some cases unnecessary. Or you could make various safe harbor type assumptions. We focus on simplification. Clarification was another area where we focused on. There's a lot of gray out there and there will continue to be. But we focused on a few areas of gray within these rules that we had identified that we thought the IRS could add clarity. Beyond those, we also provided some comments, or we're working on some comments, not just to the IRS, but also to the OECD.
There we were focusing on, again, clarification and simplification but with U.S. and multinational corporations in mind. Really the focus is on some of the safe harbors that are out there. There's transitional safe harbors that allow for shortcuts, if you will, that make the work much simpler. But many of those are temporary and they're set to expire in a couple of years and we're making some comments around those. One of them being a request that those be made permanent for taxpayers in an effort to simplify this very complex system.
April Walker: Thanks so much Cory. You did a wonderful job for me. Definitely not an international tax expert by any stretch of the imagination and it was made it easy to understand where we are. I'd like to pivot a little bit now and have Lauren take us away. I don't know if anybody knows but there's an election coming up in a couple of months and so I thought it would be interesting if we would talk about what does our political landscape mean for what the U.S. is going to do around this? Lauren, tell us what you know all around this area.
Lauren Pfingstag: Thanks for inviting me to join the podcast, April. Cory, I think a lot of professional congressional watchers would say in this space that there's going to eventually need to be some action taken by Congress to move Pillar 2 forward. What would that look like right now?
Cory Perry: It's certainly a challenge, I would say in our current environment to move Pillar 2 legislation forward. To give a little bit of background on where it's been. Historically from a political sense, the Pillar 2 rules have been a core aspect of Biden's tax platform. He attempted to move them through the Build Back Better bill a few years ago, that ultimately failed in the Senate. But they remain, and they were in his most recent greenbook, a core part of his plan. I believe they will continue to be a part of the Harris tax platform. I have no reason to believe that will change as well as the Democratic agenda going forward. It has broad support on the Democratic side. The Republicans side historically had support there but more recently they've been openly critical, I'll say of Pillar 2.
They've noted their concerns in public forums and expressed frustrations with the negotiation process. There are certainly some challenges there. It's not impossible that we could see some legislation move forward in the short-term particularly if we had, for example, a Democratic controlled government. If we had a Republican controlled government, I think the chances go down. With that said, there are some other factors on the horizon that could influence this from a political perspective. The Tax Cuts and Jobs Act, tax cuts for individuals expire in the end of 2025, beginning of 2026. Many of the favorable business provisions like the GILTI rate, the BEAT rate, the foreign derived intangible rate, and a variety of others.
Those are just the international ones, but those are set to expire the end of 2025 for tax years beginning in 2026. That sets up an interesting opportunity where perhaps we could see some compromise, maybe a budget reconciliation bill where it's not along party lines, depending on which way the government swings. Obviously, we might need some collaboration there. If we don't have a democratic government, we might see something later in 2026 in terms of legislation. There is a path forward although it does look like a challenging one.
Lauren Pfingstag: Is it true that implementing part of Pillar 2 legislatively would potentially raise revenue over a 10-year budget window? Meaning, if Congress were to move forward with a piece of legislation that put Pillar 2 into play, that they would raise a certain amount of money that could be used to pay for other provisions and a larger let's call it end of year 2025 tax bill?
Cory Perry: Absolutely yes. It would be a revenue raiser. Right now, if it's not imposed, other countries might be taxing the United States under the way these systems operate. Subsidiaries, for example, could be taxed in the U.S. if it's in an effective rate less than 15%. There's certainly revenue on the table and free revenue. If you think about it, you could tax in the U.S. or you could tax it in the foreign country. If we tax in the U.S. first, they're not going to tax in the foreign country. It is a revenue raiser. I think it was scored that way in the Build Back Better bill.
It would certainly be a pay-for those types of extensions of those expiring tax cuts that I mentioned. That's why I think it could be a lever that could be pulled in those negotiations to help further the Pillar 2 legislation in US in exchange perhaps for some of those other items.
Lauren Pfingstag: Particularly if the Democrats, as you said, did win control of the White House, the House and the Senate this November. I think this is more of a note rather than a question, but I think West Virginia Senator Joe Manchin, who was one of the most, if not the most moderate Democrats in the Senate, was instrumental in pulling Joe Biden's vision for Pillar 2 out of the Build Back Better bill. When you look ahead into 2025 and you think through the different Senate races, Senator Joe Manchin is retiring, you no longer have Senator Sinema from Arizona who is retiring.
It's hard to pick out who in the Democratic caucus in the Senate, at least in 2025, could play, or would want to play the role of a Joe Manchin and maybe stripping that out of a democratic tax reconciliation bill if we get to that Democratic trifecta of power. I'll be keeping my eye on that for sure.
Cory Perry: I wholeheartedly agree. Keeping their caucus together was a challenge last time and it seems like it could potentially be easier at least.
Lauren Pfingstag: This is obviously just holistically like a weedy, thorny topic. In my conversations across D.C., I have only met a few people, and I don't count myself among them — who really understand this. It's incredibly complicated and if you were in a room with the tax aides who staff members on the House Ways and Means Committee and the U.S. Senate Finance Committee and you could deliver one or two key messages to them about this, what would you want to tell them and have them relay to their bosses?
Cory Perry: I think there's a couple of key messages and themes here. One, I would say the world is moving forward with or without us in terms of pillar 2. At some point, I think there was thought and perhaps that thought might still exist in some, but I think there was a thought that this wouldn't move forward without the US and some of the larger economies like China and India signing on. But that's shown not to be the case. It's been enacted and legislated in the E.U..
All the E.U. member states have adopted it. There's dozens of countries across the world at this point with many more being added every month. It certainly has broad international support and it's moving forward with or without us. What does that mean? I think that means US multinationals in particular might face some challenges if U.S. doesn't enact legislation.
If U.S. enacts, there is a benefit from that. They would pay the tax most likely at the U.S. level. They'd be able to file returns at the U.S. level. They'd be able to work through the U.S. government to use the information exchange mechanisms to make sure the foreign countries have received the reporting that they need and not to mention it would shut off the under taxed profit rule (UTPR) which is beyond the scope of our discussion today but it's a complex rule. I'd describe it as the backstop rule. Effectively if no other rule taxes that rule comes in and imposes that tax.
If the U.S. doesn't do anything, subsidiaries could be taxing the U.S. As I said earlier, the U.S. profits through that under taxed profit rule, as well as other subsidiaries of the U.S. that the U.S. could tax. There's certainly revenue opportunities that are on the table that seemingly will go to other countries if we don't act. It would also go a long way in simplifying the US's approach to compliance. Because they'll be less of a need to orchestrate the two systems if we adopted one of them and made it part of our law. I think it would be easier to coordinate the two. Just overall for those reasons I mentioned earlier it would make it much simpler for U.S. multinationals in the long run.
Lauren Pfingstag: Thank you for taking again what is a difficult subject and making it digestible. That is a skill and we appreciate it.
April Walker: Yes, I echo those thoughts, Lauren and I'm also incredibly grateful for you joining because you bring a different perspective, Lauren, to this conversation and very fascinating. I was listening on the edge of my seat hopefully everyone else was. And I'm appreciative to Reema. Reema is very well-versed in international tax so I'm grateful for her to be able to ask questions that I couldn't pull off. I'm very appreciative to you Reema. Cory, I'll give you the opportunity to just as we're wrapping up final thoughts on this very heavy weighty topic?
Cory Perry: Just the closing note that I would leave is, if you think you're subject to these rules or you think you have clients that might be subject to these rules don't wait. Engage with your advisors or with your clients now. Review structures and start planning for pillar 2. The sooner that companies and accountants act, the better prepared that the taxpayer will be for the changes that are ahead. There's things that can be done now that will significantly reduce reporting in the initial years, simplify the overall process that may not necessarily be available if you wait. It's coming, it's right around the corner and that should start thinking about it now.
April Walker: Perfect. I would be remiss if I didn't say [you can find] in our show notes a landing page on the AICPA's website where you can find resources and we're continuing to work on those resources. I will put a link to the show notes in there.
Just in final closing, a little bit of a lighter topic. The name of this podcast is Tax Section Odyssey so I'd like to think about us taking a journey together, toward a better profession and in doing so I'd like to get a glimpse of my guest other journeys outside of tax. Cory, tell me a page from your travel journal or a memorable trip or something you'd have on the horizon?
Cory Perry: Sure. I regularly take trips to Taiwan, that's one of my favorite countries to go to. That's where my wife's originally from. We met in college and have been married for many years now, but I have two young boys who love to travel with me, although it's sometimes challenging to travel with them, but I still enjoy it very much. We go to Taiwan usually every year, every other year to visit her family, travel around Taiwan and see Taipei. That is a reoccurring and memorable trip journey.
April Walker: Wonderful. As I'm doing these I like to add to my travel list because I love to travel.
Thanks again, so much I'm so grateful for Cory, Lauren, and Reema. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts. I encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and I encourage you to share with your like-minded friends. You can also find us at the aicpa-cima.com/tax, where you can find other Odyssey episodes as well as get access to the resources mentioned during this episode. Thank you again so much and thank you for listening.
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