OECD: Global Anti-Base Erosion Proposal – Pillar Two

The Organisation for Economic Cooperation and Development (OECD) published a consultation – which closed on 2 December – on the Global Anti-Base Erosion proposal under Pillar Two, as part of its ongoing project: “Addressing the Tax Challenges of the Digitalisation of the Economy“.

Pillar Two focuses on the base erosion and profit shifting issues that Pillar One does not, and aims to equip jurisdictions with a right to “tax back” when other jurisdictions have not exercised their primary taxing rights, or the payment is otherwise subject to low levels of effective taxation.

The consultation, focusing on three main issues, considers:

  • the extent to which financial accounts can determine the tax base
  • the extent to which multinationals can combine income and taxes from different sources to determine the effective (blended) tax rate
  • what carve-outs and thresholds should be considered.

Whereas Pillar One was targeting international business activities (see the CTG response here), there is a risk that the proposals in Pillar Two could be applied to any multinational entity (MNE), whether engaged in business activities or not, without a suitable carve-out. Bearing in mind that the OECD’s definition of a MNE for country-by-country (CbC) reporting purposes covers any entity with one or more branches or subsidiaries in another territory, several of the proposals in the Programme of Work set out in Annex B are potentially troubling for charities and other tax-exempt entities:

  • an income inclusion rule
  • the imposition of a minimum or blended income tax rate
  • a tax charge on payments that are deemed to erode the tax base because they are “undertaxed” or not “subject to tax”.

The Charity Tax Group supports moves which tackle tax avoidance and abuse. However, we believe it is also important that measures to tackle avoidance are proportionate and do not have an adverse impact on not for profit organisations like charities. Although the Programme of Work calls for consideration to be given to the appropriateness of carve-outs for specific sectors, it does not suggest that any sector deserves a carve-out. In its response to the consultation the Charity Tax Group proposes that a carve-out for charities would be appropriate.

OECD Secretariat Global Anti-Base Erosion Proposal under Pillar Two – feedback from the UK Charity Tax Group