EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
How EY can Help
-
Our flexible EY Trade Connect technology platform can help your business view its trade operations with clarity and act with precision. Learn more.
Read more
BEPS 2.0
After two years of steady adoption of Pillar Two taxes and continued negotiations on Pillar One within the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework, BEPS 2.0 is at an inflection point. On his first day in office, US President Trump issued an executive order clarifying that the global agreement has no force or effect in the US unless Congress adopts its provisions. Further, the order instructed the Treasury Department to analyze whether any countries are not in compliance with any tax treaty with the US or have any tax rules that are extraterritorial or disproportionately affect American companies, and to offer responsive measures that the US could take in response. Congressional adoption of Pillar Two is unlikely -- and Republican members of the US House introduced a bill to impose increased US taxes on foreign business activity in the US in response to Pillar Two or similar tax measures enacted by foreign countries. Neither the Executive Order or proposed bill enact or cancel any existing law, but they do reinforce that the Trump administration and the Republican majorities in Congress are opposed to certain features of the BEPS 2.0 project and have objections as to how the negotiation process has been conducted to date.
However, Pillar Two provisions are in force in almost 50 jurisdictions, with some provisions having taken effect in the EU and other countries already on 31 December 2023. “Regardless of what the future holds, the enacted Pillar Two taxes must be calculated and the reporting requirements must be complied with,” notes Martin Caplice, EY Asia-Pacific Tax Controversy Leader. Taxpayers are already investing in technology and data management upgrades to meet the compliance requirements of multiple jurisdictions. With disparate rules and deadlines, controversy teams are also preparing to handle conflict and challenges.
With US participation unlikely and retaliation possible, the jurisdictions due to implement Pillar Two soon may delay adoption. Those poised to collect Undertaxed Profits Rule (UTPR) from 1 January 2025 may change course and other Pillar Two implementation measures could be halted. While it is possible Pillar Two could shift without US support, several major jurisdictions have shown strong commitment to Pillar Two rules and have included them in revenue projections. As such, the laws are expected to remain in effect through 2025 and during any further global negotiations.
Unwinding of Pillar Two or extending any of the safe harbors, such as the UTPR safe harbor, in the EU would require amendment of the Minimum Tax Directive, which requires unanimity of all 27 EU Members States.
For the moment, negotiations on Pillar One are still ongoing. Amount A, a formulaic approach to assign taxing rights of global business income to market jurisdictions, remains at an impasse. “Failure to reach an agreement on Pillar One will lead to a rise in tax disputes and uncertainty as the issues that spurred the negotiations still exist and countries may adopt different approaches to taxing digital services,” says Matt Andrew, EY Asia-Pacific Tax Policy Leader. Several jurisdictions have enacted digital services taxes and others have signaled their intention to follow suit if Pillar One fails. “This will lead to complexity, double taxation and controversy. Further, the concepts of how to source revenue in Pillar One may manifest in other unilateral ways, such as regional reallocations of tax rights or in transfer pricing rules,” continues Andrew.
Countries are already evaluating transfer pricing rules, as they consider how to incorporate the political agreement on Pillar One Amount B, intended to be a simplified and streamlined approach for in-scope marketers and distributors. Amount B has no revenue threshold limiting the businesses that could be in scope and can be applied now. However, it is optional, and countries may choose to apply it, or not. It is important for companies to assess how the countries that are relevant to their operations choose to react to the implementation of Amount B and how this may impact the pricing of in-scope transactions.
Tariffs
As implementation of BEPS 2.0 continues, other countries are watching the United States’ reaction and for any potential retaliation, including the use of tariffs to encourage countries to end Pillar Two adoption. During his campaign, US President Trump proposed many tariffs, including 10%-20% “across-the-board” on all goods imported to the US from all jurisdictions. While historically tariffs have been used primarily as remedy to resolve disputes over unfair trade practices, the rhetoric around these tariffs indicates they are purposed for use in negotiation, or as punitive measures. “Action on these proposals can be swift as the President can implement them without Congressional action,” cautioned Kevin Flynn, EY Americas Tax Leader. “These tariffs could undercut the effectiveness of many businesses and their international supply chain. The status quo operating model may no longer be fit-for-purpose, a business may need to adapt, and quickly,” continues Flynn.