A reforma fiscal do Pilar II da OCDE entra em águas turvas em 2025

As the pillar 1 agreement hangs in the balance and questions arise about pillar 2 global minimum tax implementation, the outlook for the OECD-brokered tax reforms is anything but crystal clear.

The two-pillar global tax reform plan will likely continue to be a hot topic in 2025 as taxpayers continue to look for more certainty in an ever-evolving tax landscape.

The plan's components are well known in international tax circles. Pillar 1 consists of amount A, which would revamp profit allocation and nexus rules and require the withdrawal and ban of digital services taxes and similar relevant measures. Also under pillar 1 is amount B, a simplified and streamlined approach for applying the arm's-length principle when pricing baseline distribution activities.

Pillar 2 comprises the global anti-base-erosion (GLOBE) rules - the income inclusion rule and the undertaxed profits rule and qualified domestic minimum top-up taxes (QDMTTs), all of which apply to large multinational enterprise groups so they have effective tax rates of 15 percent wherever they operate.

There's also the subject-to-tax rule, a treaty-based measure that allows jurisdictions to levy more tax on some cross-border payments. when they are subject to a nominal tax rate of less than 9 percent in the recipient's jurisdiction.

Of the two pillars, pillar 2 saw the most movement in 2024, with several jurisdictions adopting domestic minimum top-up taxes and the GLOBE rules and amending their existing GLOBE legislation. Some even started signing a multilateral instrument in September to implement the subject-to-tax rule.

The OECD remained busy in 2024, releasing an updated commentary to the GLOBE model rules in April that consolidated administrative guidance released in February 2023, July 2023, and December 2023 into one document.

The organization also published additional GLOBE administrative guidance in June and held a public consultation over the summer on a draft user guide for the GLOBE information return XML schema the technical format that tax administrations will use to exchange those returns.

The OECD published the optional amount B framework in February, additional guidance in June, a related model competent authority agreement in September, and an automated pricing tool December 19.

The OECD inclusive framework on base erosion and profit shifting also continued to try to finalize a pillar 1 agreement on the final text of a multilateral convention to implement amount A in addition to a mandatory amount B. However, the end-of-June deadline came and went, leaving stakeholders doubtful about whether an agreement would ever come.

With President-elect Trump's win in November, prospects for the two pillars are somewhat hazy. The United States has not yet implemented pillar 2, despite the Biden administration's attempts to do so.

The United States is also a key factor in the success of a pillar 1 agreement, but U.S. ratification of the amount A multilateral convention would be challenging.

Pillar 2: The Beat Goes On

Jurisdictions around the world began applying their GLOBE rules and QDMTTs on January 1. Some, like the Isle of Man, Jersey, Malaysia, Singapore, and Switzerland, will apply IIRS and domestic minimum top-up taxes at that time. Others, like Bahrain and the United Arab Emirates, will rely only on domestic minimum top-up taxes, while jurisdictions like Bermuda will start imposing a statutory corporate tax rate of 15 percent.

It's likely more jurisdictions will introduce global minimum tax legislation for the first time in 2025.

Several jurisdictions, including those in the EU, will start enforcing UTPRs that will apply to fiscal years starting on or after December 31, 2024.

However, questions remain about the UTPR, which takes effect when an in-scope MNE group's home jurisdiction doesn't enforce an IIR.

A jurisdiction that enforces a UTPR would make adjustments such as the denial of deductions to ensure that profits made by in-scope subsidiaries are subject to a 15 percent ETR. The UTPR was originally known as the undertaxed payments rule.

The U.K. crown dependencies, Singapore, and others have refrained from implementing UTPRS, while Switzerland cited potential risks if it chose to implement the measure.

The American Free Enterprise Chamber of Commerce and others filed a lawsuit over the summer of 2024 at the Belgian Constitutional Court to challenge Belgium's UTPR.

U.S. Republican lawmakers have expressed support for the lawsuit, going so far as to propose legislation designed to retaliate against jurisdictions with measures like UTPRs.

Despite doubts about the UTPR, some jurisdictions, including Japan, are still moving ahead with the measure.

The UTPR seems to have been designed to encourage jurisdictions to implement IIRs and QDMTTs, "but it turns out to be a rule that is very hard to justify in the current international legal framework," Mounia Benabdallah of Baker McKenzie's New York office told Tax Notes.

When the P in UTPR stood for "payments," the measure's rationale made more sense in the context of the international tax framework with the denial of deductions in response to undertaxation, Benabdallah said. "Now that in practice it seems to stand for 'profits,' it means that entities somewhere in an MNE structure can face a hefty tax bill for undertaxed profits of a group entity it may not have a relationship with, except for sharing the same ultimate parent," she added.

The UTPR also adds legal complexity and raises practical issues like access to data, according to Benabdallah, who noted its spotty implementation around the world.

The UTPR effectively penalizes MNEs in headquarter jurisdictions like the United States that don't have an IIR qualified as in line with OECD model rules and instead have another system in place, she said. "I would not be surprised if under Trump this leads to repercussions in the form of tariffs, for example," she added.

What's to Come

UTPR controversy notwithstanding, the OECD will likely continue issuing GLOBE administrative guidance in 2025. OECD officials have hinted at what's to come from delegates representing jurisdictions in the BEPS inclusive framework, which designed the two-pillar global tax reform plan.

Stakeholders can expect guidance focused on protecting the integrity of the GLOBE rules, such as more anti-arbitrage measures and ways to address "related benefits" that governments are giving companies as concessions for being in scope of the GLOBE rules.

But perhaps the most highly anticipated administrative guidance will be on permanent safe harbors. Achim Pross, deputy director of the OECD Centre for Tax Policy and Administration, said in October 2024 that the inclusive framework is actively discussing permanent safe harbors, which are designed to ease compliance burdens under the GLOBE rules.

In-scope MNEs can use the transitional country-by-country reporting safe harbor, which simplifies the GLOBE calculations they must make using data already in their qualified CbC reports and jurisdictional tax data in their qualified financial statements. If a taxpayer qualifies for the transitional safe harbor in one year, its GLOBE top-up tax in a jurisdiction would be zero that year.

Business at OECD's pillar 2 business advisory group has proposed a permanent safe harbor that is based on the transitional CBC reporting safe harbor but uses consolidated financial accounts instead of CbC reports, with minimal adjustments.

Permanent safe harbors are definitely a top priority for 2025, according to Benabdallah. Once the transitional safe harbors expire, taxpayers will have to do complex calculations when they already know they have no top-up tax liability, she said. "Being able to opt for permanent safe harbors can save taxpayers a lot of time and resources, which can be dedicated to other areas of attention in the business," she added.

Dispute prevention and resolution under the GLOBE rules are also top concerns. Pross confirmed that the inclusive framework is working to address both topics, noting that tax administrations are considering aspects of a tax control framework systems approach and adaptations to the international compliance assurance program related to pillar 2.

The GLOBE rules are still being shaped through more OECD administrative guidance, even though the rules are already in force in more than 40 countries. That makes it difficult for taxpayers to plan ahead, Benabdallah said, adding it's like flying a plane while it's still being built.

It's also difficult to predict where the rules are heading because the guidance is based on behind-the-scenes, politically influenced negotiations at the expense of taxpayer certainty, Benabdallah said, adding that taxpayers have little to no opportunity to provide input in the process.

"Then there is a great risk for different interpretations of the same rules by different jurisdictions, which is practically inevitable, especially in the context of QDMTT where there is more flexibility," she said. "This all leads to a lot of noise and uncertainty for taxpayers."

Pillar 1, Amount B, and DSTS

While stakeholders wait for updates from the inclusive framework about the fate of the pillar 1 agreement, amount B and DSTs are coming to the forefront, promising to grab headlines in 2025.

Several countries, including Japan, the Netherlands, and New Zealand, have confirmed they aren't planning to adopt the optional amount B framework. Some have said they would fulfill a political commitment to respect the outcome of a covered jurisdiction's application of the simplified and streamlined approach and take reasonable steps to avoid potential double taxation when the relevant jurisdictions have a bilateral tax treaty in force.

However, the United States made a splash December 18, 2024, when the IRS published Notice 2025-4, 2025-4 IRB 1, confirming that regs implementing amount B are forthcoming. The regs, which are expected to incorporate the entirety of the OECD's February amount B report, would apply to tax years starting on or after January 1. To that end, the IRS is holding a public consultation on U.S. implementation of the simplified and streamlined approach, noting that interested parties should submit written comments by March 7.

Meanwhile, as pillar 1 agreement negotiations stall, it remains to be seen whether countries will follow Canada's lead and impose new revenue-based DSTs or other similar measures on tech companies. Canada enacted its controversial 3 percent DST in June 2024, applying it retroactively to January 1, 2022, with payments due from in-scope companies at the end of June 2025. Canada's move prompted business lobby groups to call on the U.S. government to respond, possibly with trade action.

The United States is adamantly opposed to DSTS and has threatened to impose retaliatory tariffs after section 301 investigations into the DSTs of several trading partners concluded that the taxes discriminate against U.S. companies. U.S. Trade Representative Katherine Tai eventually announced in August 2024 that she had requested dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement over Canada's DST. It's unclear when that process will conclude.

A DST by Any Other Name...

In an effort to prevent trade wars over DSTs, Austria, France, Italy, India, Spain, Turkey, the United Kingdom, and the United States extended their unilateral measures compromise to the end of June 2024. Under the arrangement, the countries with DSTs will give tax credits to U.S. companies that pay them against future income tax liabilities under amount A rules once they take effect. In exchange, the United States agreed to withdraw proposed retaliatory tariffs on goods from those countries and hold off on additional trade actions.

Now that the unilateral measures compromise has expired with no pillar 1 agreement in sight, the United States could technically proceed with imposing additional tariffs under the second Trump administration. The first Trump administration threatened to imposed tariffs, and Trump has shown that his appetite for such measures has not abated.

Some countries with DSTs have moved to amend their DST regimes. The Indian government announced in July 2024 that it was planning to withdraw its 2 percent equalization levy, which came under U.S. scrutiny in June 2020. Italy published budget legislation in its December 31, 2024, official gazette removing the local revenue threshold for its 3 percent DST, which the United States has also targeted.

Kenyan President William Ruto on December 11, 2024, signed off on the Tax Laws (Amendment) Bill 2024, which replaces the country's 1.5 percent DST with a significant economic presence (SEP) tax.

Other countries that have floated DSTs have not yet moved any further with their proposals. New Zealand submitted the draft Digital Services Tax bill to the unicameral legislature in August 2023, citing slow progress in OECD pillar 1 negotiations.

The bill was reinstated in December 2023 after the dissolution of New Zealand's Parliament ahead of the country's October 2023 general elections. While the tax is proposed to take effect January 1, 2025, its effective date could be deferred up until January 1, 2030, if passed. In the New Zealand Treasury's budget economic and fiscal update for 2024, published in May 2024, the government said it has "still to decide whether or how to progress the DST."

Governments appear to be hesitating on proceeding with new DSTs or expanding existing ones following the U.S. election in November, according to Megan Funkhouser, senior director of policy, tax, and trade for the Information Technology Industry Council. "I think that's both due to what we saw in the first Trump administration with the section 301 investigations, but also reflects some of the comments that we've seen in the past few weeks, even since the election," she said.

Canada's DST is similar to the structure of the 3 percent DST that the EU tried and failed to implement in 2019, and it shares similar features with the DSTs that the United States targeted, according to Funkhouser.

"I've seen that development as somewhat of an anomaly, because in other jurisdictions you see more interest in significant economic presence measures and digital presence measures, which are posing the same challenges as DSTs, albeit in a different name," Funkhouser said, noting those measures still attempt to ring-fence the digital economy.

Funkhouser pointed out that the explanatory notes accompanying Kenya's Tax Laws (Amendment) Bill 2024 say that replacing the country's DST with a SEP tax "will align the taxation of digital services with international best practice."

"That, to me, is very concerning rhetoric," Funkhouser said. From the global technology industry's perspective, a SEP tax also goes against long-standing international tax principles that prioritize taxation on income instead of revenue, she added.

A Trump Card?

Overshadowing the immediate future of pillar 1 and pillar 2 are a second Trump administration and a Republican-controlled Congress. The incoming administration's approach to the two pillars is a bit of a mystery at the moment, but there are some clues, according to Aruna Kalyanam of EY's Washington office.

"Given the stated positions of congressional Republicans in response to Biden Treasury efforts to advance the pillars, it will be interesting to see how the taxwriting committees plan to handle both treatment of these inclusive framework agreement and the efforts of the OECD writ large," Kalyanam said.

"Committee leaders have discussed going so far as to rescind U.S. funds from supporting OECD operations and over the last several years, congressional Republicans have been clear in their opposition to pillar 2 efforts," Kalyanam said. Treasury leadership under Trump is starting to take shape, and the outlook for the two pillars will hopefully become clearer once international tax officials are identified or nominated, she added.

The spread of unilateral DSTs will certainly merit a response from the United States, but whether that response will be based on OECD efforts, a fresh approach, or other economic policy tools will depend on Treasury and White House decisionmakers, Kalyanam said. "The U.S. certainly is in a position to wield tremendous influence in the OECD processes, and many stakeholders are hopeful that the incoming administration will do just that," she added.