New tax challenges: BEPS 2.0 and others

Multinational companies face new tax challenges, such as the global minimum tax and a new nexus/tax law rule that allocates a portion of intangible/residual profits directly to market jurisdictions.

On July 1, 2021, 130 countries and jurisdictions reached an agreement to continue the development of the project with which the Organization for Economic Co-operation and Development (OECD) aims to mitigate the international taxation challenges posed by a highly digitized economy.

The OECD introduced a new inclusive framework on Base Erosion and Profit Shifting (BEPS 2.0) that contains a two-pillar solution to address the tax challenges arising from the digitization of the economy.

Tax challenges

Takeda, a company would be reached by the new regulations, highlighted that these changes are being progressively implemented by tax authorities around the world and represent a fundamental change in the international tax framework.

The first pillar establishes a new nexus/right of taxation rule that allocates a portion of intangible/residual profits directly to market jurisdictions, but only for the largest and most profitable companies.

As another tax challenge, the second pillar provides for an overall minimum level of taxation (15%) that sets a floor for tax competition between jurisdictions. Since the introduction of the OECD Inclusive Framework, more than 130 countries have endorsed the framework and it is anticipated that the framework will be adopted into law and come into effect for tax years beginning in 2023.

Takeda is awaiting final legislation and detailed guidance to assess the full implications in the jurisdictions in which it operates.

Separately, data analytics firm Elastic further notes that on January 1, 2022, a provision of the Tax Cuts and Jobs Act of 2017 went into effect that eliminates the option to deduct domestic research and development costs in the year they are incurred and instead requires taxpayers to amortize those costs over five years.

Elastic expects the provision to decrease cash flows from operations and increase net deferred tax assets by a similar amount for its U.S. operations.

Any new legislation or interpretation of existing legislation could affect its tax liabilities in the countries in which it operates.

Digital services

In general terms, Pillar 1 is based on ensuring a fairer distribution of profits and tax rights between countries in relation to Multinational Groups (MGs), not only in relation to companies providing automated digital services, but also consumer-oriented companies.

In this regard, a redistribution of taxation rights is contemplated from the countries where GMs are oriented to where their users and consumers are located (the market countries), regardless of where they have a physical presence.

This redistribution involves an adjustment to certain principles that have been the foundations of the international tax system for more than a century, such as the «nexus» or «permanent establishment» concept and the «arm’s length» principle.

The July 1, 2021 pact includes agreements on the scope of the proposed rules (e.g., GM with global revenues exceeding 20 billion euros with profits in excess of 10%) and some elements of the mechanism for allocating GM profits to market countries.

On the other hand, Pillar 2 contemplates imposing a starting point for income tax rates in countries by introducing global anti-erosion rules (GloBE rules or Global anti-Base Erosion Rules) that would encompass a «global minimum tax» and a deductibility rule for payments made to recipients that are not subject to taxation under the «global minimum tax» in order to enable countries to protect their tax bases.