Last October – after some humming and hawing – Ireland was one of 140 countries to join the OECD International Tax agreement, a decision Minister for Finance Paschal Donohoe described at the time as “pragmatic and sensible”. Fast forward nine months and while more details of the landmark deal have emerged, the OECD has admitted that despite working on the agreement for more than a decade, its implementation remains way behind schedule.
According to the OECD, the two-pillar agreement aims to ensure that large multinational enterprises pay tax where they operate and earn profits, “while adding much-needed certainty and stability to the international tax system”. Yet there are now talks of delays until at least 2024 before the deal’s implementation, leaving businesses in limbo as they try to ascertain the impact the agreement will have on their operations.
According to Anna Scally, head of technology and media and fintech lead at KPMG, while some clarity on the provisions of the agreement has been provided in the interim, many questions remain.
“The Model Rules around Pillar 2, which broadly contain the provisions around the global minimum effective tax rate of 15 per cent, have been issued. Guidance, providing some more colour on the provisions, was also issued,” Scally explains. However it is not yet known how the provisions will be introduced, when they will be introduced, whether or not the US can come on board, and whether or not it will be possible to secure consistency in relation to how those rules are implemented across the world, she says.
“Also, it should be noted that Pillar 1, which contains the proposals in relation to the reallocation of profits to market jurisdictions, has been delayed and we are not expected to see the detailed provisions until closer to 2024.” The implementation date for Pillar 2 has also been pushed out in the EU until 2024. Scally says it is likely to drift even further than that, although the OECD has yet to concede on this.
OECD delays are being compounded by political wrangles in the US and lack of consensus in the EU. Lorraine Griffin, Deloitte’s head of tax, points out that implementation globally may be somewhat stalled by the difficulties facing US president Joe Biden’s so-called “Build Back Better” Bill.
“The BBB would amend existing US tax rules to align with Pillar 2, but factors such as the 50:50 split in the US Senate between Democrats and Republicans and differing views on the BBB among the Democrats may present difficulties in passing the required changes into law,” she notes.
‘Unanimity required’
At EU level, the European Commission has proposed a directive to implement Pillar 2 rules across all member states. “While the final text of the directive has not yet been agreed by all member states, our understanding is that Ireland is supportive of the proposal,” Griffin says. However, Poland blocked the agreement at the Ecofin (the council of EU finance ministers) meeting back in April of this year, and at last month’s Ecofin meeting Hungary came out strongly against the proposals. “As unanimity is required in order to pass the directive into EU law, further discussions on the proposed text will be forthcoming,” she says.
Despite this lag, Scally emphasises the importance of companies engaging with the process surrounding the agreement and beginning to understand the implications of the proposals on their business.
“Modelling the implications and scenario analysis are critical to understanding the impact of the Model Rules on companies, and specifically the impact on their Effective Tax Rate (ETR). CEOs, CFOs and shareholders are ultimately going to be very interested in the impact of these proposals on the ETR,” she explains. “In addition, tax departments are likely to need additional resources to deal with the complexity of the new provisions and ultimately the related reporting requirements.”
Griffin agrees, saying it will be of vital importance for companies in the coming months to become familiar with the proposed rules and to understand the potential application to their own corporate structures. “While the Pillar 2 rules and OECD commentary highlight a desire for simplicity and ease of application, any new rules transposed into Irish law may give rise to additional compliance requirements. The application of the new Pillar 2 rules, including additional compliance and reporting obligations, will place a significant burden on businesses,” she says.
Companies will endure “a steep learning curve” as they get to grips with the new tax laws, how they operate and how they are applied in conjunction with accounting treatments, and what data/information systems businesses will need to access to enable tax-return filings and meet reporting obligations, she notes. “The data and information systems management aspects alone will require attention well in advance of the Pillar 2 rules coming into effect. Companies need to understand these requirements and put a plan in place now to address these before the rules become live.”
It’s not too late for companies to have their concerns heard. The Government recently launched a consultation on the implementation of the 15 per cent global minimum effective tax rate, which asks 25 questions aimed at assisting the Department of Finance in framing the legislative provisions required to adopt the new rules into Irish tax law. “International companies who are going to be impacted by the Model Rules should ensure their voice is heard in the consultation,” says Scally.