This Tax Section Odyssey podcast episode takes a deeper dive into the Organisation for Economic Co-operation and Development’s (OECD) initiative on Base Erosion Profit Sharing (BEPS) 2.0 which sets to reform the internation tax system with Pillar 1 and 2 tax regimes. In addition to the complexity of such international regulations, the political landscape for U.S. implementation is uncertain, and potential action is needed from Congress.

Cory Perry, Principal, National Tax — Grant Thorton Advisors, and Vice Chair of the AICPA’s International Technical Resource Panel (TRP), highlights that while many U.S. companies may not face larger tax bills if these regimes are adopted in the U.S., the administrative and compliance challenges are significant. The AICPA has submitted comment letters to the OECD, Treasury, and the IRS, focusing on simplification and clarification of rules.

AICPA resources

OECD BEPS 2.0 - Pillar One and Pillar Two — The OECD BEPS 2.0 sets out to provide a tax reform framework allowing for more transparency in the global tax environment.

What you need to know about BEPS 2.0: Pillar One and Pillar Two | Tax Section Odyssey — The OECD BEPS 2.0 project is an international effort to reform the international tax system that addresses transfer pricing, profit allocation and tax avoidance.

Advocacy

Comments to Treasury on tax issues of OECD Pillar Two, Feb. 14, 2024

Comments to Treasury on Amount B of OECD Pillar One, Dec. 12, 2023

Other resources

OECD BEPS — Inclusive Framework on Base Erosion and Profit Sharing

Transcript

April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the tax section and I'm here today with my colleagues Reema Patel and Lauren Pfingstag. They are colleagues here with me at the AICPA. They are international experts and legislative experts. We'll get into more of that as we're discussing.

I'm also delighted to have with me Cory Perry. Cory is a principal with Grant Thornton Advisors and their national tax office. He's also, and more importantly for our discussion today but probably not more importantly for his day-to-day, the Vice Chair of the AICPA's International Tax Resource panel and Chair of the OECD taskforce. That's what we're going to be talking about today.

If you are a follower and listener of this podcast, you might recall a few episodes ago we did a higher-level background on OECD's tax regimes — Pillar 1 and Pillar 2 — just laying the groundwork. Today we're going to talk more about why we think you need to be familiar with these concepts. Even though for today they may not be relevant for any of your current clients.

We're also going to delve into the political landscape and where we are today and what that could mean for the US tax system related to international tax legislation. Reema, I'm going to let you take it away for the next little bit.

Reema Patel: Thanks, April, Cory, welcome. I know a lot of us have been hearing about the OECD Pillar 1 and Pillar 2 for awhile now. Many countries have also implemented it this year and some are implementing it next year. I guess the most basic question we can start with is, who should care and pay attention to this?

Cory Perry: Absolutely. It's a wide impact in tax, but it only impacts the largest of the large companies. I would say it has a high threshold, 750 million of consolidated revenue and two of the four preceding years and you have to be taxed, want more than one jurisdiction. We are talking about very large companies but these days, even middle market companies are easily starting to bump up against that threshold. We're not just talking about the Fortune 100. We're talking about middle market and above companies that should care and think about these rules.

Obviously accountants that serve those types of companies, those larger companies. I think many of those companies themselves not even be fully aware that they're subject to these rules or may not have fully thought through how they're going to comply. The other thing I would add, there is a bit of a misconception out there that this is a corporate multinational problem. Although that is primarily where it is, it also impacts pass-throughs, partnerships and S corps that are parents within these groups can be equally subject to these rules.

Rules don't always necessarily apply at that level, but they are applied to the group as a whole. I know there's a number of practitioners out there that have clients that have grown over time and might have reached this level. It's by no means going to be the majority, certainly going to be a large minority, but I suspect many will have clients out there that might be impacted or if you're in-house at your company might be impacted.

Reema Patel: Like you said, it is for large corporations currently with consolidated revenues at 750 million euros and more. What are you seeing with the clients right now? Any challenges that they're being faced by technology? Gathering data points? I know you have to comply with many foreign jurisdictions as well as the US. Can you speak a little bit to the challenges that you're seeing just as a practitioner as well as from a client perspective as well for them.

Cory Perry: Absolutely. Companies are really still trying to get their hands around this as are practitioners. Even the rules aren't fully baked. The OECD is still releasing new guidance every couple of months on quite a frequent cadence. So the rules continue to evolve and how companies are approaching it continue to evolve as well. As far as challenges, interestingly enough, from what we're seeing, many companies are not actually seeing larger tax bills.

You'd think tax legislation, tax change like this is going to hit the bottom line and there are certainly companies out there with lower/no taxed pockets of income or that are in low-tax jurisdictions. But what I've found is the vast majority, particularly of middle market companies, are generally not in many of these low-tax jurisdictions, if at all. They are in higher tax jurisdictions, think of the US's top five trading partners- for example, Canada, Mexico, China, and Japan and the UK all have rates above or even some cases well above 15%.

The idea is to reach a minimum level of 15% and once you're above that, there may not be additional top-up tax to be paid. It may not be necessarily for all taxpayers an item that's going to really be a cash tax impact. But where we're really seeing the challenge is more on the administrative and compliance side to this.

It is a very significant undertaking to comply with these rules. It's just a massive effort that's required in order to get your hands around what needs to be done, get your systems updated so that you can comply and collect the information or the data at the right level, clean the data, so on and so forth. There was a lot of complex calculations that need to be done. In some cases there may be even third or four sets of books that need to be kept that you may not have been keeping our tracking in the past.

The rule started out with a simple premise. It was going to be a book tax based on books. That sounds simple. But it quickly evolved into a very complex tax regimes that sits on top of all the other global tax regimes that are already in place. If it wasn't complicated enough before, now we have another layer over the top making it quite complex. That's certainly been the biggest challenge is how do you deal with all of this change and international tax complexity when you're operating across borders.

Reema Patel: Definitely, I guess it just keeps piling all the time. Three sets of books, four sets of books. We don't even have CAMTI [rules] out yet. Speaking of which currently, it looks like, as we mentioned it's for large corporations, but what do smaller firms and CPAs in the industry need to know? I'm sure they're not getting into the nitty-gritty details of how to calculate pillar two taxes and all the top up taxes on different regimes.

But we don't know if the threshold does get lowered, more companies will get pulled in, possibly. What should they know? How can they keep up with and at least be aware that it's out there?

Cory Perry: I think at this point I would say it's more of a client service point. It's being aware of the potential risks in an area where your client might be subject to these rules. I don't expect many firms will have many clients that are going to be impacted. In fact, many firms might not have any clients that are impacted. But it's making that identification and helping those clients understand whether they are impacted. It is getting a lot of press and it's in the Wall Street Journal, it's on NPR in the morning, it's certainly in the mainstream news.

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