Around the world, multinational companies and governments are taking a proactive approach to adapting to the new tax and environmental, social and governance landscape – and an open dialogue is key to success
Multinational companies are facing duelling pressures as around the world, BEPS 2.0 Pillar Two implementation is changing the framework of tax incentives and, at the same time, company stakeholders are demanding progress on environmental, social and governance (ESG) factors.
Tax has been a nimble and historically successful way for governments to provide incentives to promote sustainable business processes and social responsibility. However, plans are taking shape in many countries for the implementation of global minimum tax rules designed to reduce tax competition among countries that will make it harder to use such incentives. How companies and governments balance these competing policies will have significant and long-term impacts.
Pillar Two and ESG incentives each have their own sets of objectives, implications and reporting criteria – and their intersection creates a challenge. It is important for companies and tax policymakers to fully appreciate the potential impact that global minimum rules will have on existing tax incentives.
Pillar Two was designed by the OECD/G20 Inclusive Framework to eliminate rate-based tax competition among countries. The rules that have been agreed are complex and represent a significant change in the global international tax architecture. Governments that choose to adopt Pillar Two must implement the agreed rules into their domestic laws and integrate them into their existing tax systems. Important government policy goals that are currently achieved through the tax code, including encouraging sustainable behaviours, may need to be reimagined.
Under the Inclusive Framework’s Global Anti-Base Erosion (GLoBE) rules, the financial benefit of tax incentives could be significantly diluted by a top-up tax imposed by a country should a tax incentive offered in another country take a company’s effective tax rate (ETR) below 15% in that other country.
This interaction creates a challenge for companies and governments that – faced with a climate emergency and focused emissions targets – have relied on tax incentives to catalyse their ESG goals. While tax incentives will not necessarily take a company below the 15% ETR, Pillar Two introduces a significant level of uncertainty and complexity for both companies and governments. As a result, governments may need to revisit their programmes related to ESG initiatives to make sure they will remain effective in promoting sustainable development once global minimum tax rules are in place; the same is true for other vital incentive progammes, including incentives for investment in research and innovation. Governments may also need to explore new ways of encouraging corporations to engage in ESG initiatives and to invest in their jurisdictions. It will be important for companies and governments to work together on these shared objectives.
The impact on important policy incentives is just one example of the complexity created by Pillar Two for jurisdictions. As governments enact global minimum tax rules and make other changes to their corporate income tax laws, they need to consider the cost of compliance and administration for both companies and tax authorities. An incredible amount of data will be necessary to calculate the global minimum tax liability, if any, and fulfil the associated information reporting requirements. Companies will need to confirm they have all the data available and accessible. Tax authorities must prepare for this influx of new data. New processing systems and automation may be necessary for all parties. Looking ahead, it will be important to put in place robust mechanisms for cross-border dispute prevention and resolution.
Now is the time to prepare for Pillar Two, including evaluating how to balance the requirements of new global minimum tax rules while also meeting ESG expectations. Companies and governments need to assess the impact on the global tax environment, identifying risks and charting a path forward with competitiveness and sustainable development in mind.
Overall, both companies and governments will need to be proactive in adapting to the new landscape. As jurisdictions implement these sweeping multilateral tax reforms while also advancing their own tax priorities, it is essential for companies and governments to communicate. It will be valuable for companies to model the impact of the new rules and discuss the potential implications with government policymakers. An open and constructive dialogue among all stakeholders is key to achieving the goals underlying the global minimum tax, while also supporting global economic growth and a more sustainable world.