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International Tax Policy To Watch In 2023

In this Law360 article on the international tax policies to monitor in 2023, partner Joseph Tootle discussed Pillar Two and current U.S. tax considerations with respect to foreign jurisdictions implementing Pillar Two.

As global policymakers continue to develop an international tax overhaul, it will be up to governments around the world to determine whether and how much of the plan to enact in 2023.
The Organization for Economic Cooperation and Development, which saw its global minimum tax adopted by the European Union in December, is expected to publish new details this year about the other component of its massive tax revamp, on profit reallocation among jurisdictions. While broad implementation of the reallocation regime, known as Pillar One, is far off and uncertain, countries are now in a position to consider how to place the minimum tax, known as Pillar Two, into their domestic laws.
The Organization for Economic Cooperation and Development, headquartered in Paris, is expected to publish new details this year about profit reallocation among jurisdictions, a component of the global tax overhaul it brokered in 2021. (AP Photo/Francois Mori)
Meanwhile, various transparency measures, such as country-by-country reporting, are underway in Australia and elsewhere, and the issue is gaining attention among shareholders of a few large companies in the U.S.
The EU and South Korea are paying close attention to recent changes to the U.S.-based electric vehicle tax credit, which they have said could upset global supply chains, and have threatened a policy response in 2023.
Phillip S. English of ArentFox Schiff LLP said the U.S. has little appetite to address international tax over the next year, with a divided government as a result of the midterm elections further stifling the opportunity to consider reforms.
"The next two years are going to be a very slow time in Washington with implementing international tax policy," English said.
Here, Law360 runs down international tax policies to monitor in 2023.
Adoption of Global Minimum Tax
The coming year is likely to bring wider adoption of Pillar Two, which requires companies with global revenue above €750 million ($797 million) to pay at least a 15% tax rate in every country where they operate. Over 40 jurisdictions have taken official actions to implement the tax, and some — including the EU's 27 member states, which formally reached agreement Dec. 12 — have proposed legislation, targeted specific dates for enactment or held consultations.
At least some of Pillar Two's rules have been put forth in legislation by the U.K., Canada, Singapore, South Korea, Colombia and Guernsey. Governments have announced target dates for implementing Pillar Two in Hong Kong, Norway, Switzerland, the United Arab Emirates and Japan. Consultations have been held in Australia, Ireland, New Zealand and Panama. 
And beyond the EU, a number of countries are in the process of consulting stakeholders on the best ways to implement the global minimum tax and may be considering legislation sometime this year.
U.S. multinationals and foreign jurisdictions looking at model rules for the minimum tax, which is set to take effect in 2024, would like more guidance, especially as it relates to the treatment of the tax on U.S. global intangible low-taxed income, said Joseph Tootle, a partner with Kirkland & Ellis LLP.
"The current Pillar Two model rules do not clearly address GILTI, and jurisdictions enacting Pillar Two will need to treat GILTI consistently for the intended minimum tax to apply," he said.
Tootle acknowledged that some foreign jurisdictions have signaled that GILTI can be "pushed down" from a U.S. parent to a foreign subsidiary to calculate the effective tax rate in each jurisdiction for Pillar Two purposes. However, there is no clear international consensus on that approach, and leaving the tax on GILTI to apply at the parent level could result in much higher Pillar Two taxes, he said.
"Even if there is consensus that GILTI can be 'pushed down,' which is the right answer, there's no playbook on how to allocate GILTI across the foreign jurisdictions that a group operates in," Tootle said. "There's a huge need for top-down guidance clearing up the current uncertainty, either from the OECD or another group like the EU."
Adam J. Tejeda, a partner with K&L Gates LLP, told Law360 that Pillar Two implementation may affect tax planning for companies not imminently subject to the new global minimum tax.
"While Pillar One and Pillar Two aren't directly impacting every type of company out there, I think that it does have a trickle-down effect that is impacting structuring and planning," Tejeda said.
Finalizing Pillar One Details
The details of Pillar One — the OECD's plan to allocate more taxing rights to countries shortchanged under traditional rules that require a physical presence to trigger taxation — are due to be finalized by the middle of 2023, along with a multilateral convention prepared for signatures.
The approach is bogged down on a couple of key points, including the calculation of what is known as Amount A, the above-normal profits that would be reallocated. Many developing countries, which stand to gain from the reallocation, want withholding tax to be included, while affected corporations — most of which have U.S. headquarters — say that would cause them to be taxed twice on some of their income. Moreover, the multilateral convention needed to implement the approach would need to be ratified by the U.S. Senate, which, as one practitioner recently noted, "has trouble adopting [even] treaties that everybody likes." 
The timeline for wide adoption of Pillar One has already slipped as countries have grappled with these questions as well as the more fundamental issue of how to determine the jurisdiction ceding taxing rights.
The first details from the OECD on the so-called Amount B, the portion of routine profit to be reallocated, were just released in December and show the organization is still trying to determine which transactions within a corporate group fall within its scope.
UN Expanding Its Role
The issues around profit reallocation and nexus have also been considered by the tax committee at the United Nations, which has taken formal steps to increase its role in developing international tax policy.
In November, a United Nations committee adopted a resolution calling for the body to have more responsibility over international tax negotiations, but several OECD country representatives said it could undermine progress on a global tax deal. Governments will begin discussing an international tax cooperation framework at the U.N. after the consensus adoption of the resolution, which was supported by the 54 nations in the African Group.
The U.N.'s steps could be important to monitor, according to Peter Barnes, former senior tax counsel at General Electric Co., who is now of counsel at Caplin & Drysdale Chtd. Barnes said the U.N. may be able to gain resources and "have a louder voice in international tax matters."
However, Barnes said, there's a risk that the U.N's increased role could hamper the OECD's efforts "to speak comprehensively for all countries."
English, of ArentFox, said the U.N. may not be best suited to handle the kind of tax policy development the OECD is accustomed to.
"The U.N. I think is a valuable forum, but in terms of negotiating something of this sensitivity and sophistication, I don't really think it's an effective vehicle," English said. "Although the OECD is a developed nations club, it's still probably the place where they have the set of muscles and the credibility to do this."
Mary Burke Baker, government affairs counselor with K&L Gates, said it's unclear what the broader ramifications of the U.N.'s actions will be, but there could be an opportunity for the body to exert greater influence on the debate over international taxation as leadership shifts at the OECD.
"I think the OECD has built up such credibility and such momentum in recent years, it's going to be very difficult for the U.N. to take over that role," Baker said. "Perhaps there is an opening where they could have an increasing influence on things, particularly with the developing countries."
World's Response to EV Tax Credit Changes
Legislation passed by the U.S. that included domestic sourcing requirements for an expanded electric vehicle tax credit has rattled trading partners including South Korea and countries in the EU, which are considering how to respond to the policy change.
Under the Inflation Reduction Act, enacted in August, the full $7,500 tax credit for EV purchases will apply only to vehicles whose final assembly happened in North America and whose batteries contain a certain percentage of critical minerals "extracted or processed ... in any country with which the United States has a free trade agreement in effect."
President Joe Biden said the law contains "glitches" that need to be reconciled with lawmakers' intentions not to undermine trade with allies like EU members, which have threatened retaliation given that no EU countries have a free trade agreement with the U.S.
A European Commission official said in December that the EU wanted to see results soon from the U.S. to address provisions in the Inflation Reduction Act that European officials have said are discriminatory.
The commission's president, Ursula von der Leyen, announced plans in a letter to EU leaders to simplify its rules on when and how governments can provide aid, changes she said were needed to counter the effects of high energy prices and the U.S. law.
English said that it remains difficult to see how the U.S. could address the concerns surrounding the domestic sourcing requirements for the EV tax credit in a divided Congress, whether it be through revisions to those rules or by way of trade legislation.
He said countries should recognize there are lawmakers and stakeholders listening in the U.S., but "the political equation is very difficult right now."
Grassroots Country-by-Country Reporting
Shareholder proposals asking companies to begin publicly reporting information on taxes paid, workers, payroll, revenues and profits in each country where they operate were filed during 2022 at Amazon, Microsoft, Cisco, ExxonMobil, Chevron and ConocoPhillips. In April, the U.S. Securities and Exchange Commission prevented Amazon from blocking its proposal, which represented the first time the agency had sided with investors on such a tax transparency proposal.
Following the advice of each company's board of directors, shareholders ultimately rejected the proposals at Amazon, Cisco and Microsoft. Votes will be held during annual meetings at ExxonMobil, Chevron and ConocoPhillips if those companies decline to challenge their proposals at the SEC or the agency rules against them.
Meanwhile, Australia proposed public country-by-country reporting requirements on a timeline that would make it the first jurisdiction where such rules take effect and are expected to cover multinational companies that operate there but are headquartered elsewhere.
Mobile Workforce Issues
The OECD has added remote work, also called mobile work, to its agenda for 2023 and beyond, according to Grace Perez-Navarro, deputy director of the OECD's Center for Tax Policy and Administration. Remote work is a growing trend, and the organization is seeking comments from businesses on the issue and its tax implications, she said at a conference in Washington, D.C., in June.
The OECD hadn't looked at remote work since it issued guidance on the topic as it related to the pandemic, Perez-Navarro said at the time. That guidance was specific to the pandemic and so won't inform the coming project, she told Law360. If the project leads to any results, they will come through changes to OECD model tax convention provisions and transfer pricing guidelines, she said.
Baker, of K&L Gates, told Law360 the topic is almost a "mini-Pillar One" issue in which revenues are at stake between jurisdictions that may not agree on who has the right to tax employees who work in various locations or remotely for a company in a different country.
"I think it raises all those same questions and will be equally as difficult a nut to crack," Baker said.
Baker noted that the U.S. has grappled with a similar issue that affects employees who work across state lines but has yet to pass legislation resolving the problem.
--Additional reporting by Natalie Olivo, Todd Buell, Matt Thompson, Matthew Guerry and David van den Berg. Editing by Aaron Pelc and Amy Rowe.