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OECD Favoring Adding Exemption To Corp. Min. Tax

By Alex M. Parker · 2020-08-17 20:21:12 -0400

Delegates at the Organization for Economic Cooperation and Development are leaning toward adding an exemption for depreciable property and payroll expenses to a proposed global corporate minimum tax, according to a draft of the proposal obtained by Law360.

The OECD began to overhaul standards and norms governing the international tax system in 2017 at the behest of the Group of 20 countries. (Getty Images)

The exemption would give taxpayers a carve-out from their taxable income based on a formula, similar to the U.S. tax on global intangible low-taxed income. But the undated draft, which was to be circulated to delegates of the 139-country Inclusive Framework advisory consortium, indicates that no decisions have been made on the policy and that some still object to any exemption.

The global minimum tax, which would allow countries to tax the foreign income of their companies if other jurisdictions do not tax it above a certain rate, is one part of a project to overhaul the standards and norms governing the international tax system. The OECD began the project in 2017 at the behest of the Group of 20 countries, to address concerns about taxation of digital enterprises and transactions as well as the proliferation of unilateral digital services taxes.

The OECD project, faced with a year-end deadline, seemed stuck in a standstill even before the coronavirus pandemic upended the global economy and kept delegates from meeting in person. The U.S. most recently asked that the project be paused, while the Trump administration readies a raft of tariffs in retaliation for digital services taxes, with the first set to begin against France next year. While officials express uncertainty about the path forward on the trickiest political questions, the OECD's working party has continued to work on technical issues in the proposals.

The OECD project comprises two pillars, with Pillar 1 addressing digital tax concerns through a new income apportionment method and Pillar 2 addressing the global minimum tax. The OECD circulated a technical draft on Pillar 1 earlier this month.

The minimum tax was included over concerns about income-shifting using valuable intangible assets such as patents or copyrights. Under the policy, countries would be able to immediately "top-up" a company's foreign taxes to an agreed-upon rate, ensuring that companies pay a minimum amount of tax no matter where they are present. In theory, it would eliminate incentives to shift income to tax havens.

Pillar 2 is similar to the U.S. GILTI tax, which also immediately taxes foreign income. But GILTI includes a deduction for depreciable tangible property, which is meant to focus the tax on intangible earnings. Since the OECD project began, countries have debated whether Pillar 2 should have a similar exemption.

According to the draft, delegates of the OECD working group tasked with fine-tuning the Pillar 2 policy considered many types of exemptions, including one based on research and development spending, a determination of real economic activity based on a factual analysis, or whether a country's low tax rate complies with the OECD's rules on harmful tax practices. But only a formulaic determination based on depreciable property and payroll expenses had "wide support," according to the draft. 

OECD delegates have yet to resolve other questions related to Pillar 2, such as whether it would calculate effective tax rates by country or globally. Many countries have also debated whether the U.S. GILTI rules should be considered compliant with the Pillar 2 regime, which the draft said would be addressed in the final version of the report, which the OECD hopes to release in October.

Representatives from the OECD leadership did not return requests for further comment.

--Editing by Joyce Laskowski. 

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