BEPS 2.0: The Corporate Tax Revolution For International Business Is Here!

The last few years have seen some big changes in the corporate tax world - from ATAD1 & 2 and the EU Commission's anti-tax avoidance package to the recent US tax reform. The impact of these new rules has not gone unnoticed in many countries now subject to significant changes, and often harsher tax principles.

This is just a drop in the ocean, however, compared to what's on the horizon. Brace yourselves for BEPS 2.0 which is set to make waves as it dramatically changes the face of corporate tax.

How it all started

The initiative was originally triggered by discussions on digital tax and GAFA tax but will, in fact, apply to all taxpayers regardless of their activities. A recent OECD report examines two modifications to the existing tax system: new ways to apportion income between jurisdictions and, as a "backstop", imposing a minimum tax and denial of deductions or imposition of withholding taxes on payments to "low tax" entities.

So, will pressure from the OECD be enough to make its member countries change their rules? Will the EU Commission manage to achieve unanimity on this point? Or will they wait for the change from unanimity to Qualified Majority Voting (QMV) in the EU? Only time will tell.

What we do know is that, if embraced by the EU Commission, these two principles will become an unprecedented global benchmark.

Pillar by pillar - what are the proposed changes?

PILLAR ONE

Under current transfer pricing principles, typically only a small portion of profit is taxable in a foreign jurisdiction where only basic distribution services take place. With Pillar One, long-standing and well-known transfer pricing methodologies (for example, comparable pricing also known as "CUP" or transactional net margin method -"TNMM") may become obsolete and would be replaced by new profit allocation rules.

These new profit allocation rules include:

Modified residual profit split method (MRPS) - this top-down approach would allocate a portion of a multinational's non-routine profit to the jurisdiction of the consumers. Fractional apportionment method - it would not distinguish between routine and non-routine profits and might take into account the group's overall profitability. Distribution-based approaches - bottom-up approach with simplified methods to shift taxable profits towards jurisdictions of the consumers. It is uncertain whether these three methods will be optional, or whether further negotiations between the OECD and its member countries will...