Blueprints on Pillar One and Pillar Two: Is your compliance process ready for global digital taxation?

October 26, 2020
GCMS

This summer we wrote about the European Commission’s announcement of the EU Tax Package and its emphasis on the importance of laying down a realistic compliance process in the EU cooperative compliance framework. Earlier this month we took note of the announcement of the OECD/G20 Inclusive Framework for their Blueprints of Pillar One and Pillar Two as we were curious to see what this would entail. Another initiative with a clear message that a central and unified global compliance process will become more crucial than ever.

Minimum level of taxation

Our KPMG digital tax and transfer pricing colleagues have summarized the outcomes and implications of the Blueprints with in-depth KPMG summaries (summary Pillar One & summary Pillar Two). In short, Pillar One aligns taxing rights with local market engagement. A residual profit should be taxed in the jurisdiction where the revenue is sourced. Pillar Two is based on four rules that grant jurisdictions additional taxation rights, the right to “tax back” if other jurisdictions have not exercised their right to tax. The overall goal is to guarantee a minimum level of taxation. The next step is the public consultation period, which closes on December 14, 2020. The deadline for consensus on both pillars has now been moved to mid-2021.

Be ready for what’s next!

Both initiatives set out the next steps in taxing the digital economy, with a focus on digital tax and transfer pricing. They also show that a central, unified and clear global compliance process within your company is essential to be ready for what’s next.

As an example, in order to allocate a portion of your residual profit across borders under Pillar One, or in order to apply one of the four allocation rules under Pillar Two, you must have central oversight of your local compliance positions to execute these rules. Lack of oversight will not only make it difficult to apply the future rules but could also harm your position in the event of audits by local tax authorities.

Chapter 10 of the Blueprint on Pillar One gives a interesting insight in the ambition under the simplified administration process to have a single entity file “a single coherent Amount A tax return”. In my opinion it would be ground-breaking if consensus is reached about such a centralized compliance process, which could also have massive implications to the way we do compliance across the globe on a per entity/tax group approach going forward.

We can assist you with both the technical analysis of the blueprints as well as your tax compliance process. During the coming months we will continue to learn more about Pillar One and Pillar Two. We are ready to assist you in anticipating next steps and to make sure your company is prepared for the next phase in global digital taxation. There is no need to wait.

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