Emerging topics in the quest for a longer-term solution
It is clear from the Inclusive Framework’s PCD and the subsequent public consultation meetings that some adjacent BEPS-related measures are impacting the thinking on how a longer-term solution might operate.
The U.S. tax regime for GILTI
The global intangible low-taxed income (GILTI) provisions were introduced as a component of the U.S. tax reform legislation effective from January 2018. They require a U.S. shareholder of a controlled foreign company (CFC) to include in its taxable income its share of the CFC’s net income, to the extent that the latter exceeds a deemed return on the CFC’s tangible assets.
The U.S. shareholder is entitled to a deduction equal to 50 percent of the GILTI income.
In addition, the U.S. shareholder may claim a credit for up to 80 percent of the foreign tax that the CFC has paid on the GILTI income.
Combined with the participation exemption that would also now apply to a dividend received by the U.S. shareholder from the CFC, the GILTI provisions significantly reduce any tax advantage that would arise for a U.S. headquartered group in holding its intangible assets (such as IP) in an offshore low-tax jurisdiction, and retaining the resulting profits there.
The provisions create a minimum global tax rate for U.S. outbound groups on the income deemed to arise from intangibles, effectively a rate of 10.5 percent.
This precedent has led to the Inclusive Framework using it as a prototype for further consideration of whether the adoption of a minimum tax would solve some jurisdictions’ current concerns.
While it could be expected to address concerns about certain enterprises being perceived to pay insufficient tax on profits derived from a jurisdiction, it would not necessarily address the concerns about allocation of taxing rights to market jurisdictions, hence the twin “pillars” of the Inclusive Framework’s future work.
The intersection of corporate income tax and indirect taxes
The global corporate income tax debate centers on whether there should be a shift from a profit allocation approach with a supply-side orientation, toward an approach that achieves more balance with the market jurisdictions.
OECD-driven BEPS actions on the indirect tax front (i.e., value-added tax [VAT] and goods and services tax [GST]) have already bolstered the ability of the country of consumption to impose its indirect tax on services or intangibles that are provided or made available offshore and, therefore, require no physical importation. There is increasing sophistication in indirect tax legislation so as to facilitate the registration of nonresident suppliers, and in tax authorities’ capability to collect such taxes.
Some participants in the debate are, therefore, concerned that a shift in the allocation of profits for the purpose of calculating corporate income tax would prove overgenerous to the consumption location.
Options for a global long-term response to digitalization
Of the core concepts underpinning the international tax rules contained in bilateral or multilateral tax treaties, the Inclusive Framework identified that the two put under the most stress by the emergence of digitalized business models are the “nexus” rule and the “profit allocation” rules.