Ep 98: The Side By Side package - what is it, what does it do and where does it come from?

Welcome to International Tax Bites, a series of conversations around issues and concepts of the International Taxation. I'm Graeme Jackson and I'm a Gibraltar English Lister with Hassan's International Law Firm in Gibraltar. Today, I will be speaking to my podcast partner Harriet Brown, who is a Jersey advocate and English barrister with all-square tax chambers in London. So Harriet, here we are for yet another episode of the exciting podcast International Tax Bites for all your international taxing needs. How are you today? I am excited finally to be allowed to talk outside by side because you've kept putting it off. I don't know how to put it. We did have a summary episode. But since then, and now more than six months ago, I think we've had the actual package. We have got the actual package. You're going to keep sniding at me that I've delayed it off, delayed it, aren't you? I can tell. I've got it all out of my go. It's out now. It's done. Right, okay. Fine. I've let it go. I'm Princess Elsa. Your Princess Elsa, right? That is definitely. How did it go? Definitely. Yes. Okay, let's move on. Right. So, talk to me. It was January the 5th. Today is June the 30th, which for anybody in Gibraltar knows is year end. So it was quite a long time ago. The OECDG20 inclusive framework on Beps released administrative guidance known as the side by side package. Right? It makes it sound like it's not part of great power politics, but shall we have some background on why we've arrived with this thing? It sounds quite cozy, doesn't it? Calling it side by side. It's like two old folks sitting in front of a fire in their arm chairs. Yeah. So side by side, it's presented, I think, largely as a solution to the fact that the US is not in pility. Right. Exactly. Okay, because we've had some rather odd. Joe, I don't want to annoy him, because he just tend to get annoyed. We've had some robust statements from the president of the United States about the whole package, doesn't he, and the Beps type project as being discriminatory against US? Yes. I mean, it's, I think he probably doesn't mean discriminatory in a public law sense as we would use it in common law jurisdictions, but yeah. Yeah. And so I think this, this is to address the issues that potentially arise there. And but essentially it's to make pility palatable to the US. Yeah, it's a deal to keep the show on the road. Yeah. And interestingly, when I was brushing up on my side by side knowledge today, I came across presentation at the OECN, now a long presentation that the OECD did, which I, I didn't watch because I listened to it, because I was doing something else at the same time, but which I listened to. And it is quite interesting. What they said, they had four key points that they said were relevant. The first of which was the political context, the second of which was that it apparently involves material simplifications. I think we can maybe at the end talk about whether or not we agree with that. It said that another key sort of tenant was the greater alignment of substance-based tax incentives with QRTCs. Please don't ask me what that stands for. I should know. And the side by side system. So those were the four things that on the, I think it was the 16th of January when the, when the presentation was put out there, that was, ah, qualified to fundable tax credit, that's it. You're quicker than me. At Google, yes. Yeah. So it seems from, from, there was a lot of sort of policy type talk and a lot of explaining but the inclusive frame, what keeps it to have 147 members, but now it's got 148 and all the rest of it. That's less members than we've got countries with listeners. Fewer men, fewer countries. Fewer country. It's this kind of top grade bedroom tree. That keeps the countries coming. Not only do you learn about tax, you get a primer on English grammar. I hope I'm right. Right. So those, the set of those were what was seen as by the, by the promulgators of this as sort of the key points about it. Um, obviously from everybody else's perspective, it's a bit of a further complication because actually, even if it's simplifying things, it's yet another set of rules. It's another package. And there are, of course, hand, there are sort of certain changes to the Pelletube framework that go hand in hand with these changes. So can I ask you a question early on? You can. I think that they've slapped in some simplification measures because they've got a change going on and it's, it's like a nice way to slip it in without it making it look like the original set of rules didn't work properly. I mean, I think that's a cynical perspective. It doesn't mean that it's wrong. Okay. Fine. That's good enough for me. Let's move on. Okay. So, um, if we look at, let's start with the, the exciting forward to the actual package. Um, these forwards are always brilliant because they give you the entire history. So, um, we go back to October 2021 where we get our two Pillar solution, which is now a single, I think it's, I think we can all agree, as a single Pillar solution with only Pillar two. Yeah, Pillar, Pillar one's completely dead. Yeah. Well, we're all balanced on top of Pillar two, maybe feeling a bit uncomfortable. Like, uh, like a church father in the desert. Oh, that's going to so irritate me now because I can't remember what they call a C-Tick. A C-Tick. It's a C-Tick that go up the pole. Yeah. Like a C-Tick in the desert. Have you seen though, though, the poles are really close together. So, you know, even by yourself, not only you're just having a chat. Well, I don't know if you're allowed to chat, but it's like, it's not like it's this sort of, I thought it, I was like, okay, so you stuck up a pole in the desert, but at least you're getting some proper peace and quiet. And you're not the sum of the bloke up a pole. And the feet away and you think, right, the point. The, again, it's, it's just wide ranging cultural experience. So, please talk about safe harbors. So, there are three main parts of the side by side system. We've got the simplified effective tax rate safe harbour extension of the CBCR safe harbour, which is trucks. So, just to clarify between the two there, the ETR safe harbour is going to be permanent. That's always going to be there. Right. The CBC reporting safe harbour is a transitional one and that period in which it's available has been extended by one year. By one year, yeah. What did you do? And you've then got the substance based tax incentive safe harbour and the side by, all within the side by side system. Oh, yeah. There is a side by side system. Sorry, the side by, in the side by side package, the side by side system. Is the fourth part? Yeah, that's another safe harbour, even though it's not called safe harbour. Sorry, the system is, yes, the SBS system is a safe harbour. The side by side package contains all of these things. So, yes. Thank you, OECD for the clarity. And also, yeah, anyway, look, I'm sure if I had to sit around all day coming up with acronymable phrases, I would not always have 100%. You know what I'm telling you, though, using GROC or chat GP to, they wouldn't use GROC, would they, for God's sake, do you? I would just spend the entire time trying to come up with really obscurely rude names. Yeah, as opposed to just the generally rude names, the whole day all the time, anyway. Yeah, there's no point in having one that's F-U-C-K because that's going to get vetoed, right? Yes. So, shall we go through the safe harbours because they're in the essence here, don't they? Yes, in essence. Which one would you like to start with? Let's start, well, let's do them in the order they do them and start with the simplified ETR safe harbour, which they sort of refer to as material simplification, don't they? Yeah, they do. Okay, and so that's probably the way to sort of, say the simplified ETR safe harbour in a nutshell. It seeks to address what is described as a key concern to the business community, but I substantiably reducing the compliance burden associated with the GMT, global minimum tax. In a meaningful share of jurisdictions where in-scape multinational enterprise groups operate [BLANK_AUDIO] Under this safe harbor, an MNE groups ETR is determined to a simple calculation based on the income and taxes drawn from the MNE groups reporting packages with minimal adjustments. So effectively what this does is it means that you use your existing reporting system and without having to change very much at all and I can tell you in a nutshell what you do have to change. You can then come up with a calculation to be used in Pelletube effectively and so the things that we do have to worry about. Let's just be absolutely clear then, right? This is not what you would normally call a safe harbor. This is an alternative administrative regime. I think that's probably a more accurate description. Yes. It doesn't get you out of the tax. No, absolutely not and in some cases because of the simplification you could make it worse. So you could exploit a safe harbor and pay more tax, right? Okay, fine. So yeah, so but it applies it applies a simplified administrative route and you get sort of three levels of adjustments. You get a basic adjustments, which are the ones you have to make even though this is simplified. And so in terms of determining your income, you use your jurisdictional aggregates and then you exclude your dividends and your equity gains and losses. And you have to do that one for getting your tax burden. You again use your reporting, but you have to exclude taxes that relate to excluded income. And you apply deferred tax accounting, but there's a subset of details, which is recast at 15%. What's a detail? Let me get it right. I like to do it without without. I thought you're facing a thought. I've got to ask that. Of course you've got to ask that and I was thinking, it's deferred tax liability. Fertax liability, of course it is. Right. So you can apply your deferred tax accounting, but only to certain details. Right. Okay. Now. And those, sorry, those are the adjustments that you have to make. Okay, sorry. Yeah. So those are the. The OETD refer to this is basic adjustments. I'd probably refer to them as mandatory. Right. But at a very basic level, if you just want to get the simplest administrative approach that you can. You can use your jurisdiction, like we're going to exclude a few things. Use the taxes, but excluding those on the excluded income. And you're done. You don't have to use the full accounting method under policy. Right. Great. So. That. Is that is this sort of are they talking about this being sort of related to the CBCR transitional safe harbor. A replacement or tip for it. Not a replacement for it, because it's I think you can run it. I think you have to have it in place by 2020 and 2027, but you can have it in place from. Early Jack from the start of this year. So it obviously overlaps with it. I think. I think that is sort of a little bit what it is aimed at. It certainly targets a similar. It's a similar case. And one of the things that is particularly. Good or a sold by the OECD is being particularly good about the ETR safe harbor is that unlike CBC where if you fall out of it, you can't go back into it. Here. You can go back in if you can out. You can go back into the ETR safe harbor or as you can't go back into the transitional CBC safe harbor. But so if I was a CEO, right. I would be thinking frankly. That this is about admin and not an awful. I mean, that's nice. And I'm sure my teams will be very grateful. For less work to do. And it's not really a material change to pillar two is it. So what I say this is aimed at I think. The smaller end of groups that are going to fall within. Pility where they will have less ability to move their accounting treatment and everything over. So they're counting practice. They're reporting practices over in the short term. And I would expect that this would largely become redundant over time and all would maybe be used to people as they transitioned into. Pility and then eventually dropped. But I mean, if you suddenly realize that your groups fall into Pility and you didn't realize and I mean you obviously you should but. And then you can see circumstances where this would be useful. I think but yes, it's not. It's not it's not particularly. Ground breaking. Yeah. So that's nice. Well, we've run down one more limit for the adjustments. We have only done sorry, my apologies. There's been the basic or mandatory adjustments. We've then got optional optional adjustments. You just allows you to have a more accurate but not really accurate process. And then you have what the OECD refers to as uncommon adjustments, which I think are also mandatory, which are things where you have to adjust to things like illegal payments and penalties. Okay. Fine. But so that's just technical stuff that you need to do if you're going to apply the ETR. Why do you say the mandatory if they said they're uncommon, they're actually obvious that they're rare but they're needed, right? Is that what you're saying? Well, they call them uncommon and I think that's because they don't expect people to be making a lot of illegal payments. Right. But if they make an illegal payment, they absolutely cannot that cannot be deducted from their simplified income. Okay. For the purposes of ETR safe harbor. Uncommon doesn't mean optional uncommon means. Rare happen a lot. Yeah. So it can be uncommon and rare uncommon and optional or uncommon and mandatory. Yeah. I understand. No, I was trying to think of and I was trying to because I was trying to think of whether there'd be anything to do with gambling in the US and whether that could be court but then US companies aren't in it because gambling related payments can be unlawful. But but still well, in fact, as I remember, some states have or there are boxes on tax returns for unlawful income, which would be taxable where basically you've won money gambling that would be caught by tax but still I was just. I read it more as deductions, but anyway, yeah, I was just wondering if that took me anywhere, but I don't think it did. So, okay, so they're the three, they're the three limbs. Well, just bear with me a second. Let's have a look at the more detailed that we've got here. What the guidance does do is it gives a good few examples that of when you would of how you do the simplified income or when it would apply. For example, it talks about financial service industry adjustments, shipping industry adjustments, a conditional adjustment for equity reported items. So if you recall, they were one of those things that we said, absolutely, you couldn't count. They might be reported in there. And then M and A. They say the way that they're going to deal with deferred tax adjustments is via a formula, which looks very much like all of those implements too. And so they describe it as deferred taxes spent expense being recast at the minimum rate using the formula deferred tax expense in simplified taxes times by minimum rate over accounted tax rate, which seems reasonably fair to me in the grand scheme of things. If I understood maths, I'm sure I'd agree with you. So say you have a deferred tax expense of 10 pounds. Yeah, you have a minimum rate of 15% yeah. And the accounted tax rate is 5%. Then you multiply the deferred tax expense by three. Yeah. And that makes that right. It makes sense. Because it should be bigger than. Yeah, by the same, it should be bigger by the rate by the same ratio is the difference between the account of tax rate and the. Yeah, exactly. So nothing particularly is going to turn on that. I don't think. optional adjustments. are going to be, so, under optional adjustments it says this, the following globe adjustments are required for the simplified ETR computation unless the MN group makes a five-year election not to make the adjustment. So they are optional but that you can only choose for a five-year period. You can't choose for one year and then do it differently the next year. I think it's going to be the policy. So you've got asymmetric foreign exchange currency gain all of us, accrued pension expense and you can make an annual election to include any amount of covered taxes accrued as an expense but not included in the income tax expense in the financial accounts. Yes, yeah. So the five-year rule is obviously to stop you taking some sort of benefit because you're spying for one year. I'm going to opt in this year, opt out next year. So you opt in blocks of five effectively. Just let you opt in to market value accounting so you can revalue everything in your favour and then opt out so you don't take the loss next year. Exactly, yeah. And so asymmetric foreign exchange currency gain all lots has the same definition as in pillar two, as does accrued pension expense as does covered taxes. So yeah, fairly standard. You can elect to include covered taxes related to an equity reported item and you can elect and these are annual elections as opposed to five-year elections. So these you can pick on an annual basis. These are for the QRTCs or multiple transferable tax credits which are counted as tax reduction in the JIT and which originated in the fiscal year of the election or in a prior fiscal year but are not yet fully utilised. Okay. I mean it's just there's not really, I keep saying it because there's not a lot to say it's just a series of statements. This is how it works, right? Yes. Which is fine and it needs to be explained but you can't really discuss. Probably you could if you're that are accountants than we are. So I'm accountants at all in any way shape or form. Yeah, so yes but these are all, I think these are all things that I think are going to need consideration going forward frankly. But shall we move on to the election for the substance-based tax incentive safe harbor is available under the simplified ETR safe harbor. I mean nothing that's critical that they interact. I'm being silly but they interact, right? The two safe harbors interact which is worthy of note, right? As a lawyer, I'm excited by that. Yeah, it's a bit sort of the the Russian dolls isn't it? Yeah. Yeah. And then something about transition year rules. So another thing that it's worth noting is that you cannot elect the simplified ETR safe harbor for a stateless constituent entity, investment test in entity or a tested jurisdiction with constituent entities in respect of which the M&E group has made an eligible distribution tax system election. Remind me what an eligible distribution tax system is. It's an article 7.3. Is that not helped? No. Let me get articles 7.3. So it deals with eligible distribution tax systems examples being Estonia and Latvia. Yes, I knew it was Estonia and Latvia, but what is it about them that makes them eligible? Companies can have substantial income but face zero limited tax liabilities until profits are actually paid out as dividends. Right. So it's very taxed to be paid out. It's a cash box effectively and only take out what you need. Right, okay. So yeah, okay. So I understand that. Right, okay. Yeah. And they've been very successful in attracting business. And the problem with them in the pillar to context is that you can get a really low effective tax rate and then get an excessive pillar to chop up. Right. But where you're within that and you're using article 7 to address that and you've made the election to deal with that, you can't then have this safe harbor as well. Right. Okay. Because shenanigans may be possible. I guess. And the other thing that is just I think worth mentioning is as we've already said, you can go back if you if you come out of this safe harbor, you can go back in. And this is an eminny group is eligible to elect for the ETR safe harbor for the first time irrespective of a tested jurisdiction or a fiscal year if it did not have a top up tax liability for that tested jurisdiction in every fiscal year beginning within 24 months before the first day of the fiscal year for which the safe harbor is elected. If you fail to qualify in a fiscal year after electing, you can re-elect if you did not have top up tax liability in any of the fiscal years beginning within 24 months of the first day of the fiscal year for which the safe harbor was not elected under either full-glow rules or any specified safe harbor. So again, we're getting that interaction between the safe harbors. Right. But essentially you need to not have a top up tax liability within two years of wanting to opt in in very broad terms. Okay. But again, to remind ourselves this is to opt in and out of a simplified admonition to procedure. Well, rather than the whole thing. Yes. So I mean, how many how many pages do they send that spend on this simplified procedure? It's a few. So the other thing to mention I think is that in terms of its application it's based on a tested jurisdiction basis. So it's on a jurisdiction by jurisdiction basis. Yeah, I mean, it goes on. So you can go you can go into this simplified ETR in one jurisdiction but not in another. So yes. So what they say about that is this. What did they say? Yeah. The simplified ETR safe harbor is applied on a tested jurisdiction basis. A tested jurisdiction consists of a single constituent entity or a group of constituent entities which are separate ETR is required to be calculated for the purposes of the global rules. Okay. So yeah, whatever we need to calculate an ETR we cannot do around depending on whether that's exactly. Yeah. Okay. So it's interpreted in the safe harbor rules to include a permanent establishment joint venture, JV subsidiary, etc. Which I mean, yes, of course. So yeah, so it is done on, I mean, in effect, you're going to end up with a jurisdiction by jurisdiction opt in or opt out of fund. Yeah. Yeah. Right. Well, that's Jolly. Jolly. Where would we like to move on to now? Um, what about the extension of the trans-assitional CBCR safe harbor? I mean, this is going to be fairly quick. I can't wait for it. What page are we on? I'm in 68 of 88. So we're getting there. Yeah. So that I mean, that just tells us, doesn't it? That the the simple one takes up three quarters of the. I mean, I hope that what we'll find about the simplified ETR safe harbor is that the actual documentation will be simpler than this because this isn't, this isn't sort of the model rules here. Um, if indeed we're getting model rules, this is sort of what it's supposed to do. Yeah. It's almost like commentary ahead of rules. So I would hope that it would be not as complicated, not sort of 50 odd pages. What's going to be what's going to be like if they don't give us, they've got to give us model rules. Otherwise, well, is that like that can't be it? There's got to be, there's got to be some rules that you can bring into legislation, right? Or are they going to say, I mean, New Zealand with it's whatever they say is law approach is surely like they adopted that now. How does that work? I mean, you've got the calculations by and large in there, haven't you? Um, but yeah, I mean, if they're late, then New Zealand might have already adopted it and nobody else has. They call it administrative guidance. They do call it administrative guidance, which suggests to me that we must be going to get rules because frankly, guidance isn't rules. And so we must be going to get something else. I would hope. So this was appealing to the OECD, please, even before you go for summer, please give us. Right, number three, it's only a page and a half. Let's do this. Extensions of the transitional CBCR safe harbor. So effectively, the transitional period is going to cover all the fiscal years beginning on or before the 31st of December 27. But won't include a fiscal year that ends after 30th of June 29. Brilliant. By which time will I have the rules for the super simple. ETR and they're going to dovetail nicely and. Nobody will get hurt. Exactly. Yeah, so. The transition you get a transition rate, which was 15% in 23 24 16 in 25 and 17 for 26 27. Okay. Right. So essentially, but look, they had this back to our point before here, administer three to administrative guidance. They've actually got the change to the text. What are you talking about, Graham? On on page 68. Yeah. The text is straight through will be deleted and text in bold will be. So we were talking about how the last lot was administrative guidance and therefore we needed rules. Yeah. But I suppose they're saying that is the change to the text of the rule. You see, I see, I see, I see, I see. That's what they are going to do. I don't think they've done it yet. It's the point. Right. Okay. So shall we look at the substance based tax incentives? Let's do that. Let's do that. So. What does it do? It gives a substance based tax incentive safe harbor. I guess. So what it does, it allows them any breed to treat substance based tax incentives, which are qualifying tax incentives in pillar two language. But they existed before, right? Yeah. They're not a new concept. No. As an addition to the adjusted covered taxes of the constituent entities located in the jurisdiction. So you get a cap on those calculated by reference to payroll and tangible assets in the jurisdiction. Okay. And I guess the bigger those things are the higher your cap is because you get the more substance you have. Yes. Because substance is good. Substance cures everything. I mean, yeah, it's great. Right. So the point where you have a business which actually just doesn't have a great deal of substance in the sense meant in these regimes, which might well be a perfectly compliant and willing to pay tax business. But anyone. Yes. They are exactly kinds of business. This whole shabang is aimed at, right? Yeah. So qualified tax incentives definition. This is applies to expenditure based tax incentives and production based tax incentives. Okay. So an expenditure based tax incentive is one where the amount of tax relief available to the taxpayer is based on a portion of qualifying expenditures incurred. They reduce the final economic cost of a taxpayer's imports by a fixed and determinable amount. So I mean, it seems to me that that would be most tax systems jurisdictions that offer expenditure based incentives typically target them at expenditures that are specific to or incurred in activities that are expected to have positives bill over such as research and development productivity improvements or positive environmental impact. And then the expenditure based tax incentives are calculated supporting of the cost incurred and therefore have a direct and clear connection with the investment they're intended to incentivize well. Yeah. The pillar to decide by side recognizes that that is good and therefore that reads does a QTI. Then you have production based tax incentives, which are those designed to support desired activity, but not based directly on expenditure and they give the example of an incentive based on the amount of production or reduction in industrial by products created during the production by the taxpayer. Could that also be number of employees employed and indirectly. No, I don't think so. So this is production based tax incentives can apply based on the units produced or on a reduction in negative externalities such as emissions. OK. Generally, they're attacked credit rather than an introduction and the amount of relief is generally calculated on the basis of a defined output by the taxpayer and they give the example of widgets or clean energy. Which I think is fantastic, which it's great. I mean, I take it all back. Have I ever said about the way they're right. The reports. If if we did to get mentioned, I'm all in. So I think the OECD makes a point of saying that these are conceptually similar to expand it, she based tax incentives because of the direct link to the level of activity or investment. Yeah. And so these are the two types of QTI. Let's just think about that. Let's just think about that for a second, right? What I'm saying is things that can be measurably attached to the behavior that you're trying to encourage are sort of OK within limits. But general things like I'm going to slash my tax rate to zero because I want everybody to come here are not the more general type. They're both tax incentives, but one can be direct one is directly linked to outputs. No, they're both linked to output. Aren't they? I mean, both of the examples, the product production based and. Yes, are both linked to outputs, but the example that I gave of everybody's going to pay zero tax because then you'll definitely come. That is not linked to an output. No, the only the other thing to say, well, they do differ is there are limitations on production based tax incentives. They're only eligible, whether incentive is calculated based on the volume of the production. Value incentive calculated on the value of the production are excluded. OK. And they're only included when they are based on the production of tangible property in the jurisdiction. So there's that link back to substance as well. Yeah. So I mean, that's pretty much going to be manufacturing that they do, breastly say that production about electricity and incentive there would qualify. This is electricity, tangible. They give it as an example of what will be included. That's very odd. And then there are some requirements for the incentives. But they then set out some of the calculations and how you reach your amount of QTI used in a fiscal year. Again, that's going to be a matter of accounting. They do give some quite detailed examples, which is good or bad dependent on how much you like detailed examples. We then come to the substance cap. Right. Which ensures that the amount of any allowance for QTI is limited by reference to the amount of substance in the jurisdiction. And they say the caps designed based on the measure of substance developed in the substance based income exclusion, which provides a jurist that said they watch they say provides a jurisdictional level measure that removes the need to assess each incentive individually to evaluate where then to the extent to which it is provided in relation to substance. Then there are two methods of calculation. And the first is you get a greater of 5.5% of the payroll costs or the depreciation and depreciation expense in respect of eligible tangible assets. And the second method. Is. Oh, sorry, that is both methods. No, it's not. No, it's not. The first method method is based on that says in paragraph 32 to utilize the second method for a jurisdiction. The second method is based on the carrying value of eligible tangible assets or the excluding land or the non depreciable assets. The method is designed to provide an appropriate measure of substance in relation to what tangible assets have you got other than land. Yeah, I can't see my good. I mean, again, this is all manufacturing, isn't it? This isn't going to cost me a lot. How many machines do you own? How many stock of you got what? Like that. It's real. It's basically a way. I guess to limit the impact on real world in a common businesses. Because digital economy is the thing that they're worried about. But again, why is the real world? I mean, the digital economy is more movable. If pillar two addresses that move ability so that there isn't a vast incentive to be in there isn't a vast tax rate incentive to be one place is opposed to another. This shouldn't matter or be necessary. China's not easy. the OECD is it? No. If the OECD wants to be able to re-industrialise, then it wants to be able to give tax incentives to its manufacturing base. And this unblocked that. And this is not going to do that in all, I think this essentially stems from a misunderstanding of what substance provisions are supposed to do and what they're linked to. Right. Okay. Or from an overly broad approach to substance provisions. Going back to the second method though. If you revoke your election for the second method, which is carrying value of ETAs, any asset, which was previously included in relation to the substance cap, once you revoke your election, has to be excluded from the calculation of the depreciation and depletion expense. Fair enough. Right. I would say. Okay. And otherwise you're sort of getting it to I turn you. So they say this predesnemmony grew from benefiting from applying the second method at the beginning of the useful life of an asset. And then switching to the first method wants an asset carrying value has been reduced by depreciation or depletion, which makes sense. Fair enough. Anti-avoidant. We like a bit of anti-avoidance, don't we? Now, let us just remind ourselves that all of the things that we have spoken to spoken to so far are not the sidewise ideas like us. I'm not the sidewise ideas like us. Yeah. None of us. We now get to the bit that caused the US to be willing to sort of join with this project. Or at least not kiboshit. Yeah. And so what this does, it essentially, it means that if you're within the SPS safe harbor, effectively exempts the US parented M&E from the income inclusion role and the UTPR, which obviously. Not from the QD, QDMTTs, right? Yeah, not from the QDMTT. I don't think. No, it doesn't. It's only UTPR and I have. It's going to stop everybody falling out and we're not going to get sort of like counter actions to UTPRs from the US. US domestic tax rate for corporates is 21%. Yeah. And so the SPS effectively treats the US as having an eligible domestic tax system. And the other thing that it does is just a very practical point. US politics, if the US had been ratified for the two, which I don't for a minute think was ever going to be on the cards, but had they tried to ratify it through a multilateral treaty, it would have had to go through the Senate and get two-thirds of the vote, which was never going to happen, signing up to the SPS doesn't require congressional approval. Yeah. And so it gets around that that problem effectively. So it has to have in order to qualify. So let us just imagine for one second that this thing may be applied to somebody other than just the US, which I think if I've read it right is actually impossible. But let's just imagine that it is a like a standalone test that will be applied to other countries. So to be a qualified SPS regime, it has to have an eligible domestic tax system and an eligible worldwide tax system and provide a foreign tax credit for QDMTTs on the same terms as any other creditable covered tax and enacted its eligible domestic tax system and eligible worldwide tax system prior to January the 1st, 2026. So to be an eligible domestic tax system, you have to have a statutory rate of 20%. Yeah. A QDMTT or corporate alternative minimum, that's a corporate alternative minimum tax that is based on financial statement income, subject to the appropriate adjustments consistent with the policy objectives of minimum taxation at a nominal rate of at least 15% and is applicable to a substantial portion of the aggregate income of in scope M&E groups in the jurisdiction. Is that what we used to call guilty? I think it might be yes. And no material risk that in scope M&E groups headquartered in the jurisdiction will be subject to an effective rate evaluated taking into account incentives blah blah blah blah blah on the overall profits of their domestic operations, that's an interesting word below 15%. So that's to make you an eligible domestic tax system. Yeah. And so I think an important E, you blah blah blah over the important fit there. I did I, sorry. No, consistent with the treatment of such incentives under the global overalls and agreed safe harbors. Right, okay. So it's not that's not a headline tax rate. If you've got incentives that would be recognized under the global rules and the safe harbors, then you can take those into account as well. So there's quite dependent on the wording. There's quite a big scope there for interpretation. Yeah. And then so the second thing is that it has to be an eligible worldwide tax system. And that is one that has a comprehensive tax regime applicable to all resident corporations on foreign income, and which is imposed on a broad base, whatever that means. I'm guessing it means not just territorial income only, right? Includes the active and passive income of foreign branches, control foreign companies, regardless of whether or not that income is distributed, and is only subject to limited income exclusions, which are consistent with the policy objectives of minimum tax. For example, I'm not going to blah blah blah. For example, excluding categories of income which are generally highly taxed. And incorporates substantial mechanisms which operate you naturally to address BEPS and has no material risk. That see there is a mirror of C for the eligible domestic tax system, I think. Yes, which again allows the incentives, consistent treatment and such incentives and the global rules like you just discussed. Yeah. So it's got a tax domestically in a way that's approved and it has to tax worldwide in a way that's approved. Yes. So just on that worldwide tax system, just on that worldwide tax system point, incorporates substantial mechanisms which operate you naturally to address BEPS risks. So I think that would probably be guilty as well. Guilty is going to be doing some heavy lifting here. Not just that, but things like FACCAR and like there are other BEPS action points over there. Yes. And I think again, what does it mean by BEPS risks? Yeah, because that's not it doesn't to address BEPS action points. It's not that, is it? No. And so when you've got a call, one a jurisdiction has a qualified SBA SRA gene, did you know the other, there was one more point I was going to make. Your system, your worldwide tax system, which I mean is a bit, is not a sensible term, but we know what it means. Well, it's not, is it? No, I know it's not, but you make me laugh. They say this about, oh yes, includes the active and passive income of foreign branches and controlled foreign companies, regardless of whether or not that income is distributed, which is slightly at odds with its policy on in the earlier Safe Harbor in relation to distributive tax systems. Yeah. Yeah, but it's basically, I mean, it feels, it feels like it's got echoes of the, of the at add. Have you got something that does the same job as the at add, which has got CFC. Do you want to remind everyone what the at add is? It's the anti tax points directive, which contains the hybrid mismatch rules, the controlled foreign company rules and other rules, income, income limitation. No, interest limitation. What happened to my brain there? The interest deduction limitation rule. Yeah. And so it feels like it's holding, whoever it is, that mystery country that we would never know who they are to a standard of anti avoidance, which is generally accepted by OECD EU standards, right? Yeah. So what are they going to do? So just OECD and EU standards are not identical. I didn't say there were. Well, you're saying here in relation to the OCD standards in the at add of relation to the EU standards. Yes. Fine. I was not saying they were the same thing. I was saying there were two that are independent, but maybe my sentence was not as clear as it could have been. It's alright because I clarified it for you. No need to say that. In that not-paptionizing way. Ah! Okay. It's like you've never bloody met me. I've known you for what? It's seven, eight years. You know, for-well, I know they're not to say. Yeah, but not everybody else doesn't know that. It's not just-one hopes it's not just me who listens to this. There'll be some-there's an interesting point here. And there are any brief with its UP located in a jurisdiction that has a qualified SBS regime. Should be listed as such on the central record. How many do you think are currently listed? And M&E, located in just-it would be listed in the central record. No, it's the jurisdiction that's listed. Not-not yet, but-the inclusive framework has to determine it first. Yes, and how many do you think- Well, I'll be none. No, no, this one. Is it America? It's recognised by the OECD as having a qualified side by side regime. Now, whether or not it's on the central record yet, I don't know- Is the central record a single post-it note with USA written on it? No, because it's got-so it's got tables for income inclusion roles, domestic minimum top-up taxes, safe harbors, SBS regimes, and qualified status under the GMT. So it's got various different things, but if you click on the qualified SBS regimes, it is the US and-yeah, that's it really. Now, is it possible for somebody to become a qualified SBS regime to-otherly-otherly US? Like, actually possible, because-now, this is what I'm going to-what-why I'm asking. There is a time limit on when you have to have implemented your eligible worldwide tax system, which is the first of January 2026. Well, if you didn't have one before, you can't- But, yeah, so at the first of January 2026, did any countries in the world have- Did they have an equivalent of guilty? Yeah, an equivalent of guilty. Was there anybody who wasn't already in Pila 2 that had an equivalent of guilty? I wouldn't- If those were, no. The only one I could think of, and I'm-sorry, let me- The only possibility. The only possibility is China, and I know nothing about Chinese tax, right? But-but they-they've-they've worded this as if it's open to everybody, and we think it might not be open to anybody. No, I mean, this was a bit that was aimed very much at the US, so I think you can't really criticize them for the facts. But why not just say the US has a system that's-let's recognize why all this fast about tests? Well, I don't know, maybe it isn't fast. I don't know. Maybe the right thing- Because that's basic. You and I both know if the US drops its corporate income tax rate, its headline corporate income tax rate to 19%, they will not remove them from the central record. They'll cross 20 out and write 19 on him, crayon. Whether or not, they'll write 18. Yeah. And I'm sure they'd use a pen, not a crayon. Don't be so rude. We see you, OECD. We see you for what you are. Oh, I feel better now. Right. So once you've met that, what happens? Apart from you get part of the Post-it note. There's a safe harbor. So basically, does it just turn off pillar two wherever you are, apart from the QDMTT? It provides a safe harbor for such M&E groups to minimise compliance. Now, administration costs consistent with the policy objectives of the GMT. So what it does is, on election by the firing entity, the top up tax for a jurisdiction for a fiscal year is treated as zero for IIR and UTPR, while the constituent entities located in the jurisdiction are eligible for the side by side safe harbor. And they are so eligible if for a fiscal year, the UPE is located in the jurisdiction with a qualified SBS regime for the fiscal year. So basically, yes, you get no top up tax under IIR or UTPR if your ultimate parent entity is in the US. Right. And there is no impact on QDMTT, as I think I've said three times. Well, it bears repeating, I suspect that's because that's dealt with. Well, it's a domestic tax, isn't it? It's actually, yeah, a QDMTT is recognised by pillar two, but it is not one of the pillar two taxes. Taxes, is it? No, if you're paying a QDMTT, then that has certain benefits under pillar two. Yeah, yeah, but it's essentially domestic and pillar two recognises whether or not something is a QDMTT. Yeah, yeah, yeah. So that's just different conceptually from an IIR or a UTPR. Exactly. Because it's not, oh, to drive the point, it's not within the gift of the OECD to turn off Jersey's QDMTT, that's Jersey's business. Yeah, yeah, so I mean, this works a little bit like the QDMTT safe harbor effectively. Yeah, it's the same sort of mechanism. Would you like to go through the last bits? So there is a headline, so right? That is the headline. There's the UPE safe harbor, which is going to replace the transitional UTPR safe harbor as well. That's good. Do we want to just talk a little bit about that? So again, it's an election. You can elect into the UPE safe harbor and where you've elect, well, well, your filing entity has elected. The top up tax for the UPE jurisdiction is treated to zero for the purposes of the UTPR, where the constituent entity is located in the UPE jurisdiction, a UPE safe harbor. And they are eligible, where it is jurisdiction with a qualified UPE regime. A jurisdiction has a qualified UPE regime, if it has an eligible domestic tax system, which was enacted in effect, as at the first of January 2026. Which is at least a 20% statutory nominal corporate income tax, after taking to account preferential adjustments and subnational corporate income tax. A QDMTT or a corporate alternative minimum tax based on financial statement income, with a rate of at least 15% and no material risk that in scope, M&E group had quarters in the jurisdiction will be subject to an effective rate of tax of less than 15% on their domestic operations. So that's that no material risk rule, which we've seen a few times. Yeah. Yeah. That gives a lot of freedom to domestic jurisdictions to say, I mean, I'm guessing there's got to be some guidance coming on that, right? Uh, yeah, you type say. Oh, in fact, we've got a couple of paragraphs in the side by side bit about it. Um, no material risks, UPE located in jurisdiction in scope, global rules will be effective rate of overall profits of the domestic operations below 15%. I mean, I thought the point of the global rules. I thought the point of the global rules was that could happen. Was that was that not it? What why are we not there? Why are we still worried about that? It's based on a pragmatic assessment of the overall operation of the tax system applicable in the relevant jurisdiction, including the availability and treatment of tax credits and incentives under the tax system. But who does the evaluation? Well, I think I think that one has to do it oneself. So the country where the subsidiaries. So that's going to that's going to lead to concerns amongst tax teams. Uh, yes, I think so. Yeah. I mean, that seems to me to say, work it out for yourself. Not, um, not anything else. I'm just having a look to see, um, if there are any with qualifying UPE regimes at the minute, because again, there's that free first of Jan 2026 point. I'm not coming up with anything, which doesn't mean anything because you are but a human being. Well, not finding something doesn't mean that there isn't anything. Yes, I mean, entire careers in archaeology have been built on that. And I got my start to archaeology. It's another, another saw point. So, um, what do we think about the whole package as a whole, Harriet? I think it is, I think yes, it is being used to implement some changes. I think some of it is not brilliantly thought through. And I think the side by side is obviously just a way to make this palatable to the US, but it doesn't work without the US. So fair play to them for getting something over the line in difficult circumstances, I would say, probably. Yeah, I think we all sort of, I mean, when we first heard of Pillar 2, didn't we? I think you were definitely one of the people that said this. I probably said it. I know there are several other people that I know that said it, that this was always going to be the outcome that the US was not going to change its legislation through its own version in the bin and take up a foreign invented version. It was never going to do that. This was always going to be how it turned out. And by the way, well done to the US, he's defining an opportunity to sneak a load of other stuff through at the same time. I don't think any of it's particularly objectionable. I think the substance-based stuff could have been the substance-based tax incentive safe harbor could have been done better. But it's not objectionable. No. I just think it could have been done better. And of course it may be because, yeah, it may be. It seems to focus on substance and circumstances where substance isn't necessarily relevant. And if they want to incentivise manufacturing, brilliant, say you're doing that and do it. If it's for something else, I'm not sure that this achieves it. Right. So have we covered the ground as we say in almost every episode? Yeah, I mean, we might have put our foot on a spot or two of shaky, shaky ground, but I don't think we've fallen quite into quicksand on this one yet, have we? No, I would be saying, if I was leading a tax team in a pilar too relevant jurisdiction, I would be thinking about that test around danger of less than 15%. If I had any doubts. It's one of those things where you feel that they may need, well, yeah, well, you feel you may need a bit more detail, but you're not sure that it should be dealt with in guidance. But yeah, I get it. Yeah. Anyway, okay. Harriet, thank you very much for your time today. That's been fun. I was, do you know what? I was absolutely dreading it. I thought it was going to be very dry, but I've really enjoyed it. Thank you so much for your time. As ever, a tour de force, as they say. And thank you very much to everybody for listening. This is, of course, not advice. I'm not advised. Definitely not advice. It is instead just a conversation between two people talking about tax. Thank you very much for listening and good night.