Blueprints for a new international tax regime fit for the digitalizing global economy were published by the OECD/G20 Inclusive Framework on BEPS (the Inclusive Framework) on October 12, 2020. Because the new regime represents “global law” and introduces concepts and rules not found in existing domestic and treaty laws, a parallel tax universe is created. For example, in Pillar one, the new regime allocates taxing rights based on sales threshold and formulary allocation of a multinational enterprise (MNE) group’s profit while the existing law allocates taxing rights based on permanent establishment in the source country and attribution of profit according to comparative transactional pricing methods.
It is difficult to predict the chance of success of such parallel tax universe when there are many known and unknown challenges of implementing the new regime. One known challenge is political, as the “losers” in the new regime (notably the United States) may not want to be part of the new regime. Other known challenges are technical and legal as the new regime must be translated into operational rules at the global level and domestic level. The blueprints have provided impressive details but are far from enough. Given the fact that the European Union and Canada have recently attempted - but not yet been able to introduce corporate consolidation and formulary allocation - it is difficult to predict if the global consolidation for in-scope businesses under Pillar One would actually work. As such, there are many perils ahead in turning the blueprints into reality.