On May 23rd, 2022 the Belgian and German tax authorities organized a colloquium on the two-pillar approach. The colloquium was held in Brussels and was hosted by Mr Hans D’Hondt, Chairman of the Management Committee of the Belgian Federal Public Service Finance.
The colloquium was opened by Mr D’Hondt and Mr Martin Kotthaus, Ambassador of Germany in Belgium. In their opening address, they referred to the need for a multilateral solution to reform taxes durably amidst the current geopolitical challenges. The linkages between the Belgian and German economies and the need to fairly allocate the tax burden of large companies was underscored. They referred to the ECOFIN council to be held on 24 May and expressed the hope that agreement will be reached soon.
The first panel discussed Pillar One and was moderated by Mr Martin Kreienbaum, Director General of International Taxation for the German Federal Ministry of Finance and former chair of the OECD’s Committee on Fiscal Affairs.
Dr Kunka Petrova of the German Federal Ministry of Finance gave an overview of the main building blocks of Pillar One on which a Public Consultation was already held. The second speaker , Achim Pross, Head of the International Co-operation and Tax Administration Division at the OECD, referred to the need to stabilize transfer pricing and allocation of profit rules under the current system. He also referred to the importance of binding early tax certainty. He referred to a voluntary process engaged by the MNE on three kinds of possible outcomes:
- certainty that a MNE is not in scope of pillar one;
- an advance decision on certain components, for example on revenue sourcing; and
- comprehensive tax certainty, for example for a certain period of time.
The next speaker was Mr Eric Stessens, Sr Vice President Tax at Mastercard. He pointed out the uncertainty of the future tax system and expressed the wish for a final consultation on the whole of Pillar One. Mr Kreienbaum indicated that within the possible time limits public hearings may be organized. Mr Stessens also pleaded for dynamic commentaries on pillar one. He further pointed out that carve-outs from Pillar One should be meticulously designed not to jeopardize equal treatment of MNEs. He also mentioned that reliance on headcount under Pillar one, linked with “working from anywhere” as the new normal (remote work force) could raise issues, On his wish list, you can find binding dispute resolution and the unlimited carry forward of losses and profit shortfalls.
The last speaker was PwC’s Isabel Verlinden, Partner – Corporate Fiscal Strategy. She reminded the audience of OECD materials showing that since 1965 the collection of corporate income tax as a portion of GDP did not go down. While this doesn’t take away the need to modernize the international tax architecture to reflect today’s realities, she questioned whether superior returns and hence economic rents automatically sit within the user network or with consumers. Amount A would lead to a formulary override for – all in all – a reallocation of a relatively small part of the profit of the largest, most profitable MNEs. All the rest remains within the arm’s length principle. To illustrate the intensity on resources and difficulty on traceability she gave the example of sales to a third party distributor that in turn re-sells the widgets to other countries. It is for the MNE in question very difficult – if at all possible and at what compliance cost – to trace the end customer in the chain. Finally she pointed out that according to paragraph 4.29 of the Pillar Two Model Rules, Pillar one should be applied first. As a practical solution, she referred to the netting system between countries inspired by the IMF approach and the launch of a pilot program with willing MNEs, for example on the basis of ICAP.
Asked about her “wishlist” Isabel pointed out the importance of Amount B in the overall architecture of Pillar One. Currently, Amount B is formally deferred until after the launch of the MLI. It could however be a pragmatic way to reach tax certainty based on quantitative and qualitative factors. An Amount B without an Amount A should even be possible and further work on implementation of simplicity measures is welcomed..
The second panel, moderated by Mr Tom Jansen, Head of the General Administration Expertise and Strategic Support of the Federal Public Service Finance discussed the Implementation of Pillar Two. The first speaker on the panel, Mr Uwe Ihli, Head of Sector, Corporate tax directives and CCCTB, DG Taxud at the European Commission gave a state of play on the Pillar Two Directive. Mr Harald Piérard of the Belgian Tax Authorities welcomed the postponement of the application of the directive, but added it will remain a challenge to be ready in time. Pillar Two will become a separate Chapter in the Belgian Income Tax Code. Further, he stressed that not all details are fully known yet, which increases the difficulty of the exercise for the Tax Administrations. He also pointed to the difficulty of combining local GAAP with IFRS, in particular for the implementation of the Qualifying Domestic Minimum Top up Tax (QMDTT). He also pointed out the need to adapt the R&D incentives to be acceptable under the Pillar Two rules. He mentioned that the OECD Secretariat confirmed that the Subject to Tax Rule (STTR) should not be based on the theoretical minimum rate, but on the rate effectively applied. In such a case, taxation would in general be higher than 9 %, the minimum rate under the STTR. The BTA would prefer an ex post application of the STTR.
The third Panelist was Prof. Dr. Deborah (Debbie) Schanz from the University of Munich. She referred to the already existing complexity under IFRS, the existing deviations, the complex adjustments and the lack of knowledge in many countries. A way forward on simplification, tax authorities could identify the red flags that would lead or not to a reporting under Pillar Two:
- no or very low corporate income tax would lead to reporting;
- a high tax country where in nearly all cases the effective tax rate is above 15 %, no assessment would be needed of the subsidiaries in that country;
- countries where in general the tax rate is high enough, but where some concern may exist because of, for example, specific tax incentives, those cases should be scrutinized.
Under those conditions, MNEs would
- have nothing to do under the second case;
- calculate a simplified ETR (for example taxes paid / country tax base but adjusted for the potential red flags) and file where the ETR could fall below the 15 pct.
The final speaker, Mr Dennis Beyers, Head of tax at UCB, stressed that companies are not against the minimum tax, but that innovation is so key that it needs to be accommodated effectively. . He welcomed the strong signal from OECD and EU to ”take innovation seriously”. He also indicated, however, that deferred tax assets may create tax effects and the treatment under Pillar Two may result in adverse effects hampering business (for example in case of scale up or lack of cash). He also pointed to the fact that pre regime tax losses can only be recovered at 15 % and hence foregoes neutrality. He also referred to the importance of legal certainty, the compliance burden put on business and the danger of unharmonized rules, e.g., between the EU and the US. Upfront certainty is a necessity and cross-border disputes should be addressed..
The Ministers of Finance of Belgium, Mr Vincent Van Peteghem, and Germany, Mr Christian Lindner, confirmed the commitment of both countries to implement the two-pillar approach swiftly which can be called an historic milestone. They expressed the hope to reach final agreement on Pillar II soon and progress on PIllar One at the OECD Ministerial Meeting of 8th June.
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