As of 2024, the Pillar 2 rules will become a reality within the EU and other jurisdictions worldwide. Under Pillar 2, the Global Anti-Base Erosion (GloBE) rules ensure that large multinational enterprise pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. These GloBE rules will be implemented through a common approach, which means that jurisdictions wishing to introduce the rules will do so via their national law. Since the rules will be transposed into the national law of each jurisdiction and enforced by the tax authorities of that jurisdiction, differences could arise in the interpretation or application of the rules. This may result in inconsistent outcomes. In a worst-case scenario, an enterprise may have to pay ‘top-up tax’ in several jurisdictions.
The OECD has acknowledged this and has released a consultation document exploring various dispute prevention and dispute resolution mechanisms for achieving tax certainty under the GloBE rules. We believe that the mechanisms presented are inadequate, and that there is an urgent need for robust legal protection.
Dispute prevention mechanism
The consultation document first looks at dispute prevention mechanisms to ensure a common interpretation or application of the rules by the tax authorities at an early stage in the compliance or assessment process. Examples of this are the conclusion of bilateral or multilateral advance pricing agreements (APA) or bilateral or multilateral advance tax rulings (ATR). However, these mechanisms will only provide secondary measures for dealing with disputes and will not be able to avoid all disputes. Not all OECD countries provide taxpayers with the option of concluding an APA or ATR, and with regard to potential differences of interpretation, only a bilateral or multilateral agreement will achieve the desired result. Currently not all countries or tax treaties provide a legal basis for a bilateral/multilateral agreement. To do so requires this to be implemented in model treaties; only then would there be a proper basis for advance legal certainty.
Dispute resolution mechanism
As the OECD has acknowledged that the tax prevention mechanisms cannot provide certainty in all cases, a dispute resolution mechanism must also be put in place. The consultation document outlines several options, one of which is the introduction of a multilateral convention. However, as this requires jurisdictions to agree on common concepts and wording, it will be quite a challenge to have this ready as of 2024.
So far, the GloBE rules have not been included in existing tax treaties and thus they do not provide for any legal protection relating to Pillar 2 taxation. Also, relying on tax treaties has some limitations: not all jurisdictions that implement the GloBE rules have treaty relations with one another. And taxpayers that may already have access to a MAP under a double tax treaty, cannot always enforce its outcome, nor is it binding on tax authorities.
We believe that a multilateral convention is the only solution to this problem. It would provide for full legal protection in the case of an enforceable procedure, giving taxpayers the option to force the competent authorities to enter into an agreement, and if necessary to start binding arbitration. Taxpayers should have access to a MAP procedure and should be able to initiate it, not only for double taxation issues but also for taxation that is not in accordance with the GloBE rules. The outcome should be binding, otherwise it will just be an empty formality.
The Pillar II rules have been introduced at a rapid pace, which has resulted in very significant deficiencies in legal protection. Although it is good that the OECD has acknowledged this, it is worrying that the Pillar II rules will enter into force before these deficiencies have been rectified. The big question is whether there will be consensus on how to rectify this before the rules are introduced in 2024. The OECD has indicated that the introduction of a multilateral convention takes time and we do not expect agreement to be reached on it this year. However, given the far-reaching impact of the GloBE rules, the OECD, as the policy-making body, should in my view devote its full attention to safeguarding legal protection for taxpayers in respect of these new rules.
If you have any questions or would like to discuss this topic further, please reach out to Rian Waaijer.