Episode Transcript
[00:00:00] Speaker A: Foreign and welcome to our podcast series and this is the A and M Tax Talks Tax Policy Updates where we're going to bring you insights into the latest developments in global tax policy and controversy space.
This is Matt Andrew, I'm a managing director and I'm the global head of tax policy and controversy for A and M and I'm located at the moment in Hong Kong. I also have with me Bruno Encentio who's based in Lisbon and is an expert in tax policy and controversy as well. And we'll be working through in the next seven to ten minutes in relation to a very topical area which we're all interested at the moment, which is the developments in relation to Pillar two.
So first of all Bruno, I think there's three elements which we want to talk just briefly touch on today in terms of the development of the new side by side regime which will sit alongside the global minimum tax.
The number one, that's number two, we've got this transference to a new simplified permanent safe harbor. At the moment we've got the temporary CBCR or country by country reporting safe harbor. And then thirdly, we've been hearing a little bit about qualified refundable tax credits which means that which have a different type of treatment to normal tax incentives which have less of a downward pressure in relation to the effective tax rate for the global minimum tax. So firstly Bruno, this side by side system has really been developed I think from what we hear from publicly by the US which is not really wanting to move towards the global minimum tax but retain its guilty regime, its own CFC regime now referred to as the NCTI or NECTIE regime.
And that'll be really as an umbrella for US UPS. US groups will not be subject to the income inclusion rule in the under tax payment rule, but rather be subject to the own US guilty or necktie regime in terms of ensuring that you get to an effective tax rate in terms of the key features of that new side by side regime which is yet to be announced, but the architecture has been worked up by the inclusive framework.
What's your thoughts in terms of as you look forward of what sorts of features would be in that new side by side regime.
[00:02:35] Speaker B: Thank you very much Matt and let me also to welcome everyone and thank you for joining us in this episode of the podcast.
So what we feel is that the side by side system is getting stabilized. There seems to be broad agreements on the design.
There are two or three relevant elements. First, this seems to be acknowledged even by the US is that the qualified Domestic minimum top up tax. The QDMTTS will will have prevalence so they will apply before any NCTI inclusion or otherwise any other eligible side by side system.
Then what will be the features of the eligible side by side system? So what kind of requirements tax system would have to meet to be qualified as an eligible side by side system?
And here it appears that there are three, four broad requirements so that there is comprehensive taxation of income both at domestic and also foreign income.
The foreign income would have to be taxed irrespectively of distribution. So to have features of CFC regime and then there will have to be a credit for the qdmtts and this credit would have to be granted in accordance with the domestic foreign tax credit rules of each country. So I would say that these are the three broad features of the eligible side by side system.
[00:04:31] Speaker A: Right. Thanks very much, Bruno. So a lot of changes coming through and I think what that means is if for those US Groups for example, we know that they're going to have to rethink about their ETR calculations as we move into the new system and we'll come back to the timing potentially around that as well. Bruno, just the second area, qualified refundable tax credit.
Under the current rules that really means an incentive which is creditable within a three year period and could be potentially in cash or cash equivalent. I think we've heard publicly that the may be looking at a much broader view about what what could be eligible for qualified refundable tax credits, super deductions, depreciations, other types of tax credits potentially.
What what's your expectation as you look as you look at what's your expectation in terms of as we think about qualified refundable tax credits or MTTCs marketed transferable tax credits as well. What what might you expect as we as we progress down the pat, looking at different types of encinos and looking at the different types of treatment.
[00:05:41] Speaker B: Thanks Matt. I guess here in terms of tax incentives, maybe three key points for me. First, as you already mentioned, the broader revised framework that we can expect in terms of tax incentives. So if we look to the G7 and then to G20 statements, they talk about substance based tax incentives, which ultimately could mean that any tax incentive which is granted on substance could be covered by the revised framework.
Now the next question may be okay, what is the scope of this revised framework? And I think we have three possibilities here. First, and that is already publicly reported as well, expenditure based tax incentives will be covered by this revised framework.
Then maybe potentially we could also have certain production based tax incentives. Acknowledging that in terms of the rationale and in terms of the substance requirements, production based tax incentives, at least certain types would meet identical goals as expenditure based tax incentives.
The last element of the scope that I have some questions is would we also move to include income based tax incentives because income based tax incentives traditional have less favorable treatment in accordance with the application of the Pillar 2 rules. They are not perceived favorable by international organizations because fundamentally they are less efficient or they are perceived to be less efficient. So the question is will they be covered or not in the scope of this revised framework?
Then the second element is going to be as you mentioned, we have the QRTCs and the QRTCs and MTTCs, they have a special treatment under the rules.
So they increase the denominator of the ETR formula because they represent an increase on income. And the rationale, the policy rationale behind that is because it's to align the treatment with financial accounting since as you mentioned Matt, that they are cash or refundable in equivalent to cash for financial accounting purposes they are treated as income and Therefore the pillar 2 aligns with that treatment and therefore allows to increase the denominator in that amount.
Now Wood did the same treatment applied to the other types of incentives that will be revised and would meet under the umbrella of the substance based tax incentives.
I have some doubts on that because the policy rationale to treat QRTCs MTTCs as income does not apply or is not replicated to other types of incentives. So I guess the other option could only be one is that we would need to look to the numerator of the ETR formula to the COVID taxes and based on that possibly allow some increase or of COVID taxes or otherwise would not be reflected the tax incentive in a reduction to cover taxes.
Then I guess the last element on the tax incentives when you talk about the substance based tax incentives revised framework is whether there will be any limitations so or caps.
Because I would expect that if we allow the tax incentives to be acknowledged of a favorable treatment under the Pillar 2 rules without any caps, ultimately this can lead that effectively we would get to a tetr of zero or almost zero and that probably would not be in line with the goal that is behind the pillar 2 framework. So probably there's going to be some caps here.
[00:09:47] Speaker A: Okay, no, that's great. Thanks Bruno. Just lastly, just on the we've also been hearing about the permanent simplified safe harbor. I'll take this one just to sort of note at the moment we've Obviously got the safe harbor, which is temporary, it's based on CBCR data, it has to be qualified and also has.
Has a limitation in terms of the timing that it will apply.
Moving forward into this permanent simplified safe harbour. I think we're going to expect to see an arrangement or a framework which has less adjustments to the, to the numerator and the denominator, potentially jurisdictional in nature as opposed to entity by entity.
In terms of the calculation has, has a permanence. And the question will also be whether it'll be used based off consolidated financial statements or local financial statements as the base, as opposed to cbcr. And the broader question around that is the timing. If this comes in relatively quickly, say the 1st of January 2026, that's an overlap with the current CBCR or temporary safe harbor, which means you can see situations, Bruno, where it could be applied at both. You could potentially have both going, depending on whether jurisdictions choose to apply the temporary or the permanent. Or it might still be in the CBCR safe harbour because they need more time to change the rules or some may wish to move to the new safe harbour, which I think will create some challenges and some inconsistencies potentially in terms of where we end up with those ETR calculations under those sorts of safe harbours. So I think it's going to be very, very complex, potentially for a period of time.
[00:11:38] Speaker B: Definitely.
[00:11:39] Speaker A: Look, look, we, we're running out of time, so I want to thank everyone for joining us today. Bruno and I stay with us as we continue this journey and our upcoming podcast. Please also check out our monthly newsletter, which will bring you the latest key updates around selected editorial pieces from our global Tax Network. And don't forget to follow this channel. There'll be regular insights and updates through podcasts coming your way. And if you haven't done done so yet, subscribe to receive the newsletter directly into your inbox. And with that, I thank you and Bruno thanks you as well. Thanks very much for listening.
[00:12:16] Speaker B: Thank.
[00:12:29] Speaker A: You.
