What you need to know about BEPS 2.0: Pillar One and Pillar Two

The OECD BEPS 2.0 project consists of two pillars. Pillar One applies to the biggest and most profitable multinational enterprises and reallocates part of their profit and taxing rights to the countries where they sell their products and services. Pillar Two introduces a global minimum corporate tax of 15% to prevent tax avoidance and base erosion.

The U.S. has not yet adopted the OECD project into its tax system, but it will still impact U.S. multinational businesses that operate abroad. Practitioners need to know about the OECD project because it is a major change in the international tax system that will affect many multinational enterprises and their tax compliance.

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 friend and colleague, Henry Grzes. He's a colleague here with me on the AICPA's Tax Practice & Ethics team. Welcome back, Henry.

Henry Grzes: Thanks April. Happy to be back.

Walker: Wonderful.

The aim and goal of this podcast is definitely not to teach you everything you ever wanted to know about OECD and Pillar One and Pillar Two because we certainly couldn't do that on this podcast. But, we would like to talk about why you need to care, why you do need to know high level what this framework is about, and I'm going to try to listen also because I know when I start hearing this, I definitely tend to turn off my listening ears.

Everyone turn on your listening ears, as they say in preschool, and let's get going. First, I've been saying and I've said it a couple of times, and I know that we as accountants love acronyms, OECD. Who is this, and what are their goals?

Grzes: We're going to start basic, as you said. OECD stands for the Organization for Economic Co-operation and Development. Now from their website, they describe themselves as an international organization that works to build better policies which result in better lives. Their goal is to shape policies that foster prosperity, equality, opportunity, and well-being for us all.

Together with governments and policymakers and citizens, they work on establishing evidence-based international standards and finding solutions to a range of social, economic, and environmental challenges. These include economic performance, creating jobs to foster strong education, and fighting international tax evasion and international standard setting.

The goal of the OECD project we're talking about today is to reform the international tax system and provide a more transparent environment for tax. The official title of the project is referred to as the OECD BEPS 2.0, Pillar One and Pillar Two. By the way, BEPS stands for Base Erosion and Profit Shifting.

Walker: Thanks, Henry. I think we can all agree that transparent tax environment sounds like a good goal, but when I start hearing about pillars, I think about building buildings, but that's not what this is about at all. So tell me more about Pillar One and Pillar Two.

Grzes: Each pillar addresses a different gap in the existing rules that allow multinational enterprises, also referred to as MNEs, to avoid paying taxes.

First, Pillar One applies to the biggest and most profitable MNEs and reallocates part of their profit and taxing rights to the countries where they sell their products and provide their services. In effect, where their consumers are. It deals with transfer pricing issues and the allocation of profits and adopts new nexus and profit allocation rules with the objective of assigning a greater share of taxing rights over global business income to market countries.

Without these rules, these companies can earn significant profits in a market without paying much tax there. It is a plan to reallocate some taxing rights to countries based on where their customers are located.

Pillar One originally targeted large, profitable digital companies, but now applies to most large profitable multinationals. The G20 OECD project on addressing the taxation of digital economy began in 2019, building on the final reports issued in 2015 in the earlier projects on BEPS.

Pillar Two was released in December 2021, and when adopted, would apply to a much larger group of MNEs with global annual revenue of 750 million EUR. These companies would be subject to a global minimum corporate tax.

With these new rules, companies organizing their affairs in a way that their profits, in a given jurisdiction, whether that jurisdiction is deemed to be a low tax one or otherwise, are subject to an effective tax rate lower than the minimum rate. If that is the case, those profits would be still taxed at the minimum rate of 15%.

Walker: In April-language, Pillar One is talking about transfer pricing, which transfer pricing obviously has been an issue for the whole time I've been doing tax, which is a long time, and then Pillar Two is a minimum tax, and it's a high level, 750 million EUR. Where does this regime stand in the United States?

Grzes: Currently, there are no enacted laws that incorporate Pillar Two into the U.S. taxing system. There has been proposed legislation, but the implemented laws abroad will still affect U.S. multinational businesses. U.S. adoption of these pillars would require Congress's approval.

While countries are already adopting Pillar Two without a U.S. agreement, Pillar One would likely require U.S. approval to go forward since a large fraction of the income affected is from U.S. multinationals. The deadline for the agreement on Pillar One was extended for a year through 2024.

Canada was considering a digital service tax, also known as a DST, and delayed adoption while Pillar One was under consideration, but it is now continuing with a retroactive DST.

According to the Congressional Research Service, which is a nonpartisan shared staff to congressional committees and members of Congress, if Pillar One is adopted, there will likely be a revenue loss to the U.S. due to the reallocation of taxing rights, and increased tax on U.S. firms, and an associated increase claim of foreign tax credits. If Pillar One is not adopted, DSTs that have been adopted over the past few years in other countries would likely remain in effect and proliferate in other jurisdictions.

There is no current proposed regulation in the U.S. that incorporates Pillar Two into the U..S taxing system, as I mentioned earlier. The IRS issued a notice released in December of 2023 which barely scratches the surface on the relation of Pillar Two with foreign tax credit and dual consolidated losses.

But Pillar Two has not yet been enacted in the U.S. Despite the lack of adoption in the U.S. at this point, the laws impact MNEs because they do business abroad, but there is still much needed guidance in the U.S. on these taxes.

Walker: Quick summary, no U.S. taxes have been implemented by this minimum tax so far for Pillar Two, but still, we'll talk about this in a few minutes, still we can't ignore this and we'll talk about why.

A question came up for me, again, I'm no international tax expert by any means, but I hear minimum tax and I think how does this relate, if at all, to the corporate alternative minimum tax, CAMT, I think it's also called, affectionately, imposed by the Inflation Reduction Act a few years ago. Are they connected or like each other in any way, and also how about the GILTI regime that was added as part of TCJA? I know that's also an international tax provision.

Grzes: The two taxes CAMT and Pillar 2 are completely unrelated. Inflation Reduction Act imposed a Corporate Alternative Minimum Tax, as you mentioned, CAMT is the acronym equal to the excess of 15% of a corporation's adjusted financial statement income.

Keeping with the theme of acronyms, that would be AFSI over its corporate alternative minimum tax, foreign tax credit. AFSI is the net income or loss set forth on an applicable financial statement with certain adjustments. This tax is effective as of December 31, 2022. Pillar 2, however, is a 15% effective tax rate and CAMT is a 15% tax based on AFSI, which is effectively booked income.

In regards to GILTI as part of the Tax Cuts and Jobs Act, the U.S. adopted various changes to its international tax rules, including this new tax, which we refer to as GILTI, which stands for Global Intangible Low Tax Income. These rules apply to the revenue of non U.S. companies that U.S. corporations and other citizens control. These entities are referred to as controlled foreign corporations or CFCs. GILTI is a CFC blended tax regime under Pillar 2, but it's important to note the taxing of GILTI is much different than Pillar 2, even though Pillar 2, as it was being developed, used GILTI as its basis. GILTI is based on a blended tax regime versus Pillar 2, which is based on a country-by-country one.

Walker: That's helpful to help me understand. Definitely still no expert on this, but I certainly want people to understand why they need to know to be able to talk intelligently about these different regimes and taxes. Tell me, give me a case for why I need to know more and care about these developments?

Grzes: Well, that's a great question, and as we all know, the world is becoming a smaller place by the day. Although these rules primarily impact large corporations, the accounting profession has a role because many practitioners will need to understand these rules and stay abreast of the changes which are happening quickly so they can guide their clients through the complexities of compliance.

Walker: Got it. Definitely more to come on this issue. Let's talk through the challenges that we'll face in the businesses that we serve and represent in working through these new regimes.

Grzes: As you indicated, there are many challenges and those include understanding the rules and the compliance associated with that. That's a big one. Increased reporting and tracking requirements, including increased documentation burdens and reporting.

There's also the cost of implementation, administrative burden of complying with Pillar 2 will significantly increase compliance costs. Also understanding the transfer pricing rules, especially when it comes to Pillar 1. We think all practitioners anticipate some form of tax law changes in conjunction with the numerous provisions of the Tax Cuts and Jobs Act scheduled to expire at the end of 2025. And it is possible that these OECD rules may be addressed as part of this anticipated legislation.

Walker: Perfect. We're definitely continuing to do more work in this area with resources and we're definitely following all the potential legislation that's coming up or that we expect will come up either towards the end of this year, end of 2024 or certainly towards the end of 2025. There's so many provisions that are expiring, so we will continue to follow this.

Henry, I like to have a little fun with my guests. In closing, I like to think about is taking a journey together. Today on our journey, we're taking an international journey, but it doesn't have to be -towards a better profession. In doing so, I love to hear about your bucket list items or a trip you have planned. You are a well-traveled individual, I know, because you are a friend of mine, but I'd love for you to share something that you're excited about.

Grzes: My wife and I will be spending a week or so the summer in the Azores, which are the islands off of Portugal, as well as within Portugal on the continent itself. Very much looking forward, we've never been, we know people who have visited those places and they loved it. We're very much looking forward to visiting the country and experiencing the culture and everything that it has to offer.

Walker: Very nice. You speak Portuguese?

Grzes: I do not, but I will find a way between now and then to expose myself to the language. So that I can at least…

Walker: At least ask for a drink.

Grzes: Ask for a drink and identify where the bathroom is.

Walker: Very good. Those are the important things. Thank you again so much Henry, for sitting down with me and talking about this very complex topic. Again, we really just wanted to give you a nice highlight of what you need to know and that there's more to come from us on this topic.

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 podcast and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find us at the aicpa.com/tax to our other episodes, as well as get access to the resources mentioned during the episode. Thank you so much for listening.

Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices.

This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you're not already a member, consider joining this prestigious community of your tax peers. You'll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.