25 November 2021 CTF Conference - Finance Update

This summarizes the last portion (dealing with the OECD Pillars initiative) of the comments made by Shawn Porter (Associate Assistant Deputy Minister (Legislation), Department of Finance) at the Finance Update webinar hosted on 25 November 2021 by the Canadian Tax Foundation.

Pillars 1 and 2 process

International tax has been a key priority in recent years – including the “Pillars project.” It’s been a challenging process. Discussions have been going on for a number of years on some fundamental reforms. The large group of countries involved, with diverse sizes, economic structures, and states of development, make the process complicated. Detailed blueprints were released and consulted on a year ago in October, but these did not necessarily reflect an agreed path forward, especially on Pillar 1 – which the previous US administration was not prepared to sign on to.

In 2021 with a new US administration, the talks took on new energy and new urgency. There was an important breakthrough reached on October 8th with political agreement on a two-pillar tax reform endorsed now by 137 countries out of the 141 members of the inclusive framework. This package was backed by Canada, all of the G7, and all of the G20. In political terms, many believe that there may be a relatively narrow time window to get this done, so there has been an agreement to focus efforts and push hard to finalize and implement both pillars by 2023. That is obviously an ambitious and daunting timeline. It is also less than ideal in terms of allowing for as much stakeholder input as one would like, and I’ll say more on that process in a moment.

Pillar 1

For those less familiar with the substance of the provisions, Pillar 1 is about the allocation of taxing rights. The priority of Canada and many other countries has been to address new digital business models. Given US sensitivities, the agreement is to focus on a reallocation to market and user countries of a shared residual profit for the largest and most profitable global MNEs across the economy, with exclusions only for those in the extractive and financial sectors. This is a substantial evolution from what was envisioned in the blueprint a year ago. Instead of modernizing the nexus threshold to include business models that in some sense produce income in local markets, the scope is now quite broad, albeit only for very large and profitable MNEs. And there is pressure to narrow the exclusions. As a result, there are still significant mechanical elements being worked out.

Pillar 1 is quite novel, essentially adopting a formula allocation for a subset of profits of large MNE groups determined using accounting values – at least three sources of novelty. It is recognized that this will require an unprecedented level of administration cooperation among countries to enable the system to operate in a harmonious way that provides certainty and avoids double-taxation. This pillar needs to be implemented by a new multilateral convention that will depart from the standards in existence in treaties, so it involves a heavy international legal overlay.

Pillar 2

Pillar 2 as you know is a global minimum tax regime. The aims here are to reduce incentives for profit shifting and to place a limit on tax competition. Again, a significant amount of compromise was involved in the process, and is reflected in the October 8th agreement. But in the end, there was a remarkable show of support and commitment by 137 countries, including previous holdouts like Ireland, Hungary, and Estonia, and major emerging players like China and India. The agreed minimum effective rate of 15% is higher than many had anticipated. Of course, the global community is keen to see what the US will do in this space. Things do seem to be moving in the US Congress on GILTI; that said, GILTI coexistence is very important to Canada and so we are monitoring the US developments closely.

Pillar 2 is probably more advanced, in a technical sense, than Pillar 1, though here again, there are many technical issues imbedded in this Pillar, and work has continued at a fairly feverish pace to work out and get agreement on all of the many mechanical elements. This includes for example issues like the treatment of timing difference in the determination of effective tax rates where input from stakeholders on the blueprint and by the business advisory group at the OECD has been important in shaping deliberations.


As I reflect on where things stand, I do think the October 8th agreement is historic. There is so much that can be said about it, and a lot has. It is true that much work remains to be done prior to implementation, but the mere fact that such a political agreement exists among such a large group of countries is remarkable. That is attributable in large part to the high level of political ambition that has been brought to bear. Again, I do not mean to suggest that there is not a lot of work to do yet to get to implementation, but you cannot get to the goal line if you do not keep moving the ball down the field. And the ball has moved a considerable distance.

On substance, you can see the pressures and tensions from the evolution and construct of the agreement. In Pillar 1, you see new compromises between residents and source countries, a modest shift from a production-based income tax to a destination-based one, and the novelties I mentioned earlier. In Pillar 2, you see the tensions between countries wishing to retain tax competitiveness tools and countries wishing to constrain tax competition. Sometimes the same country can harbour both sentiments at the same time in different contexts. In the minimum rate and the substance based carve out, you can see efforts to distinguish acceptable tax competition from artificial profit-shifting. The agreement more than anything is a product of these various pressures, and yes, constraining tax competition does compete to some extent with pre-existing tax policy and practices in many countries.

One suspects that the new paradigm will take some getting used to. It is key that it be done together on an internationally coordinated basis if it is to hold. One also has to acknowledge the uncertainty in how the revenue impacts will be distributed among countries - not only the impact of open design issues and the use of accounting data, but hard-to-predict behavioural responses of the multinational firms and by countries.

I do not intend today to delve too far into the substance. It’s a very difficult to have a thoughtful short discussion about this topic given the reach of the reforms, the complexity of the policy implications, the nature of the negotiations, and the heat of the politics. My intention was merely to provide some context for what promises to be a very busy year ahead.


In this regard, although we welcome constructive engagement at any time, we anticipate that the impetus and need for engagement with stakeholders will pick up soon as rules are released, more details become available, and we all work our way through the implementation period. The implementation plan, attached as an annex to the October statement on the pillars, indicated that model rules to give effect to the globe rules will be developed by the end of November 2021. I would like to think that the OECD may be in a position on Pillar 2 to release new material before too long.

The implementation plan also indicated that, by the end of 2022 at the latest, an implementation framework would be developed, covering agreed administrative procedures and safe harbours to facilitate administration and compliance. It is understood this would be a separate output from the model rules. We expect there will be robust engagement with business and the tax community in developing safe harbours and any other measures to reduce the compliance burden.

Beyond that, I do not have further details to share today, due to the nature of this multilateral process, the range of legal instruments necessary to implement the political agreement, and the timelines. Consultations will be extensive, both formal and informal and ad hoc, and we may require some flexibility on timing. But clearly we recognize there will and ought to be a high level of interest, and we look forward to engaging and hearing from stakeholders as the situation unfolds.

Delayed deliverables

Thus, there is a lot on the go. The election and ensuing process has set some things back, so that there is some catching up to do. We recognize that there was no summer release and we are nearing the end of fall. I will not list all the affected measures, which include interest deductibility and the hybrid rules. To add to this, you might expect the government to move on some of their platform commitments, which included the use of tax measures in a variety of areas, to name just a few, housing, labour markets, clean tech, scientific research and experimental development, tax rate increases on financial institutions and minimum tax on individuals. I do not have any news to announce today on any of these items, but I mention the platform just to provide you with some indication of other possible areas of work.

I fully recognize that many of my comments might prompt more questions, and scratched heads - but I hope I have provided the attendees with some general updates as to what is going on here at Finance.