Elizabeth Stevens Comments on OECD Pillar One and Two and U.S. Tax Reform in International Tax Review

The Inclusive Framework (IF) is scheduled to meet on October 30-31 with the G20 meeting afterwards. So, countries can expect an updated statement with more details being filled in. The weeks ahead will be crucial for international tax reform, however, US tax reform is key to making the OECD’s plans work.

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The blueprint for pillar one seems to be driven by digital business models and the activities from which revenue is earned. The way companies work in the economy has changed so much in our lifetimes that the design of pillar one as proposed in the blueprint might not be durable enough given the pace of technological change.

“We're going from the arm’s-length standard, which has applied broadly for the last 100 years, to now doing something that's kind of an arm's length/formulary hybrid,” said Elizabeth Stevens, member at Caplin & Drysdale.

“Maybe it's not meant to last for another 100 years but I worry that it will very quickly become obsolete,” said Stevens.

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“Practically, there is no incentive to have a tax rate below 15% if you have an effective minimum tax in the capital exporting country,” said Stevens.

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“Much like how the existing architecture of GILTI has driven a lot of the architecture and considerations under pillar 2, if we move first and make changes to GILTI and have something in place, then it will be hard for the ultimate product coming out of the Inclusive Framework to materially deviate from that to keep the US on board,” said Stevens.

However, the political signals don’t seem favorable for pillar one making it past the US Congress. “It seems very unlikely to me. A lot of companies that would be affected by pillar one have gotten on board with the OECD process and are trying to participate constructively to help shape something that is acceptable to business,” said Stevens.

“What I gather from Congress, the Senate and their representatives is that pillar one is still going to disproportionately impact US companies,” she explained.“ Given those factors, I really have my doubts as to whether pillar one will ever make it across the finish line in the United States.”

Pillar one will also require treaty changes that the US cannot do so anytime soon. Many tax professionals thought pillar two was much easier for the US to settle on. This may prove to be the case.

“I would be very surprised if they tried to implement pillar one in the United States without making treaty changes. There are broader legal questions about using a multilateral instrument to modify existing bilateral treaties and needing both parties to sign. I think we would need senate ratification for that,” said Stevens.

“The US Senate is poised on a knife edge, still looking at the reconciliation bill before the end of the year. That's the hopeful vehicle for changes that might be consistent with pillar two,” she added.

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