BEPS 2.0 — Changing the international tax landscape
The agreement on a global solution regarding the BEPS 2.0 initiative within the OECD will change the international tax landscape as we know it. The BEPS 2.0 initiative consists of a Two-Pillar Solution. Pillar One represents a significant departure from the standard international tax rules of the last 100 years, which largely require a physical presence in a country before that country has a right to tax. Pillar Two secures an unprecedented measure for a global minimum level of taxation.
The OECD and the EU aim to start with the effective implementation of the BEPS 2.0 rules as early as 2023, which means that affected taxpayers have limited time to prepare. We therefore recommend Belgian multinational enterprises and Belgian businesses of foreign multinational enterprises to take timely actions to understand the potential impact of the Two-Pillar Solution, even before all details and rules are ready for implementation. Based on an initial impact assessment, the need for organizational responses and future internal compliance measures can be considered.
Pillar One and Pillar Two – a short recap
Pillar One will provide for a reallocation of taxing rights for the profits of the largest and most profitable multinationals. The proposal foresees in a reallocation of profits to (market) jurisdictions where sales arise, irrespective of any physical presence in those jurisdictions. The rules will apply to groups with more than €20 billion in worldwide revenue and a profit margin before tax of at least 10 percent. For a summary of each rule under Pillar One, we refer to the following KPMG Report.
Pillar Two will introduce a global minimum tax rate of 15% aimed at tackling the remaining base erosion and profit shifting situations as well as ending the race to the bottom for corporate tax rates. Since Pillar Two applies to multinational groups with revenues exceeding €750 million, the consequences could be more considerable for Belgian multinationals in comparison to Pillar One.
While the OECD has sought to simplify Pillar Two, the rules remain complex. In short, under Pillar Two, ultimate parent entities of a multinational group will be required to pay tax on income generated in a foreign jurisdiction by group entities in so far as the effective tax rate of the foreign income is below the global minimum tax rate of 15%. Taxation of the foreign income at the minimum rate can – alternatively – be achieved at the level of another group member by denying deduction of intragroup payments. In addition, Pillar Two also facilitates a measure whereby certain payments will be subject to withholding tax if the beneficiary is not subject to a minimum level of tax. For a summary of each rule under Pillar Two, we kindly refer to the following KPMG Report.
Specifically within a Belgian context, the interaction of the global minimum tax rate of 15% with tax incentives such as the innovation income deduction and R&D credits should be considered closely, as well as the interaction with tax assets carried-forward.
What businesses should know
Although uncertainty still exists on the technical details of both Pillar One and Pillar Two, it is clear that BEPS2.0 will lead to a more complex international tax system. Multinationals will experience a higher compliance burden and an increased need for tax documentation. Furthermore, under Pillar Two, multinationals may see an increase in their corporate tax liabilities. It is therefore critical to discuss the impact of these changes for the business with senior executives, audit committees, and other stakeholders and start planning appropriate actions.
Understanding the impact and the potential organizational responses requires insights of many tax specialties, including diverse areas such as: international tax, transfer pricing, restructuring, internal tax compliance processes and control design. KPMG professionals from all these areas and from across the global organization work together to help our clients with managing the ramifications of the BEPS 2.0 rules.
We have developed tools which enable you to assess the likely impact and the degree of focus you need in order to respond effectively to the challenges that the BEPS 2.0 rules will bring. The rapid assessment tool allows companies, with only several hours of effort, to assess their potential cash tax effect and potential effective tax rate, as well as provides detailed quantitative analysis and summary reports with variable visualizations.
Going further, KPMG Tax professionals can help you understand, communicate, and evaluate appropriate actions in light of the BEPS 2.0 rules. We can also assist you with sharing your insights and communicating towards senior executives, audit committees, and other stakeholders via the KPMG BEPS 2.0 Model, a proprietary modeling tool built on KPMG Digital Gateway.
Finally, under the current circumstances, it is important to follow the OECD, EU and Belgian developments concerning BEPS 2.0. KPMG Belgium closely monitors these developments as well as their implications for businesses. Visit our website to access our recent webinar. If you have any questions in this respect or if you are interested to learn about our tools to assess the impact on your organization, feel free to contact us and we are delighted to assist you.