1. On 10 July, the G20 endorsed the key components of the two pillar approach to international tax reform that was recently endorsed by 131 countries and jurisdictions, constituting the vast majority of the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS). Each of the two pillars addresses a separate concern.
2. Pillar One targets the largest multi-national groups focussing initially on those with EUR20 billion of consolidated revenue or more and net profits in excess of 10% (profit before tax/revenue) and will require them to pay tax in the locations where their customers and users are located. A formulaic approach will be used to allocate a percentage of profits between each jurisdiction. Pillar One should effectively require in scope multinationals to pay at least some tax in the markets they interact with.
3. Pillar Two, the key components of which are commonly referred to as the "Global Minimum Tax" or "GloBE" and which is the focus of this FAQ, introduces a minimum effective tax rate of at least 15%, calculated based on a specific ruleset. Groups with an effective tax rate below the minimum in any particular jurisdiction would be required to pay top-up tax to their head office location. The tax would be applied to groups with revenue of EUR750 million or more, making it far more widely applicable than Pillar One.
4. The Global Minimum Tax attempts to limit tax competition by introducing a globally uniform floor, below which the effect of low tax rates or fiscal policy measures would be largely obviated.
HOW WILL GLOBAL MINIMUM TAX OPERATE
1. The Global Minimum Tax consists of three principle rules, the Income Inclusion Rule (IIR), the Undertaxed Payments Rule (UTPR) and the Subject to Tax Rule (STTR).
2. The IIR will apply in priority to the UTPR which will act as a backstop to the IIR. The IIR and UTPR will operate differently but in a complementary fashion. They will reference a broadly similar calculation methodology and ruleset. Both rules will refer to the same minimum effective tax rate, which as outlined above should be at least 15% and will be calculated based on a uniform set of rules specific to the Global Minimum Tax. In combination, the IIR and UTPR are referred to as the GloBE.
3. The STTR is a treaty based rule and is fundamentally different from the IIR and UTPR. The STTR will reference a rate of 7.5% to 9% and will apply in priority to both the IIR and the UTPR. However, the STTR is narrower in scope and may face implementation obstacles.
WHAT IS INCOME INCLUSION RULE?
1. The IIR is similar in operation to a controlled foreign companies (CFC) rule. The IIR will be applied by and collected in the jurisdiction of the head office. It will apply in respect of each jurisdiction in which the group has a subsidiary or branch. However, it will not apply to the head office jurisdiction itself.
2. Under the IIR, the effective tax rate of each jurisdiction, calculated in accordance with specific Global Minimum Tax rules, will be determined based on all of the consolidated companies or branches in that jurisdiction. It will then be compared with the minimum tax rate of at least 15%. Top-up tax will be charged to the head office to make up for any shortfall.
WHAT IS THE UNDERTAXED PAYMENTS RULE?
1. The secondary rule under the Global Minimum Tax is proposed to be the UTPR. The UTPR will apply after the IIR and serves as a backstop to the IIR.
2. One scenario in which the UTPR would apply is where the jurisdiction in which a group is headquartered has an effective tax rate below the minimum tax rate. This is because the IIR itself does not apply to the jurisdiction of headquarters. Any top-up tax would then be collected under the UTPR by the countries in which other group companies are located.
3. The implementation of the UTPR could be delayed, such that the IIR is implemented before the UTPR. This could offer a temporary reprieve for groups that have their headquarters in low tax jurisdictions.
WHAT IS SUBJECT TO TAX RULE?
1. The STTR is a treaty based rule which may override treaty benefits in existing treaties in respect of certain payments, where those payments are not subject to a minimum level of tax in the recipient jurisdiction.
2. There are several key differences between the STTR, the IIR and UTPR:
- Firstly, the STTR may apply irrespective of the size of the group (i.e. the EUR750m threshold may not apply).
- Secondly, the STTR only applies to certain categories of related party payments.
- Thirdly, the STTR does not reference the same calculation methodology or rate as generally applied under the Global Minimum Tax. The STTR applies on a payment-by-payment basis and is triggered where the full amount of a payment will not be subject to tax at a nominal rate of least 7.5% to 9%.
3. Where the STTR applies, treaty relief that would otherwise have been provided may be denied, with the maximum applicable withholding tax being 7.5% to 9%. The STTR applies before the IIR and UTPR and any tax collected under the STTR should be factored into the Global Minimum Tax calculations used for the purposes of the IIR and UTPR.
4. The STTR is a treaty based measure and is anticipated to be enacted bilaterally following a request from either party to a treaty. It is also anticipated that the majority of jurisdictions requesting the introduction of the STTR will be developing countries. Accordingly, treaties entered into between larger economies are less likely to be affected by the STTR, or may not be affected at all.
MOST OF THE JURISTIDCTIONS WE OPERATE IN HAVE TAX RATES ABOVE 15%, WILL THE GLOBAL MINIMUM TAX AFFECT US?
1. Whether top-up tax will apply under the Global Minimum Tax will depend on the group's effective tax rate calculated in accordance with the Global Minimum Tax rules in each jurisdiction where it has consolidated subsidiaries or branches.
2. While the headline rate of tax of a jurisdiction is relevant to this calculation, it is not determinative. We anticipate that the Global Minimum Tax will be relevant and significant to a number of jurisdictions that have headline rates of tax exceeding 15%.
3. Various factors could influence the application of the Global Minimum Tax, in particular book-tax differences such as exclusions, exemptions and incentives that are offered under a jurisdiction's domestic rules, but are not offered under the Global Minimum Tax rules.
A NUMBER OF JURISDICTIONS WILL NOT PARTICIPATE IN THE GLOBAL MINIMUM TAX, WILL MOVING OUR HEAD OFFICE TO ONE OF THESE MITIGATE THE TAX?
1. The IIR is applied by the head office jurisdiction. If the head office jurisdiction does not adopt the IIR, the immediate subsidiary jurisdiction(s) will have the right to apply the IIR.
2. Some groups may have a structure to which the IIR does not apply. This could be the case where the head office jurisdiction does not apply the IIR and where there is only a single tier of entities beneath the head office. Or, it could be because no parent entity in the group operates in a jurisdiction that applies the IIR.
3. Where the IIR does not apply, the UTPR may apply as a backstop measure. The UTPR is still being developed. Whether the UTPR will apply will depend on a number of factors. One particularly relevant factor is the UTPR's date of implementation, which may be deferred.
4. The impact of moving a group's head office will be complex and involve consideration of a multitude of factors. The Global Minimum Tax rules have design features that mean a change in group head office location may not significantly impact the overall application of the rules. However, there are likely to be exceptions and scenarios where a significant difference could arise.
Source:
https://amcham.com.my/wp-content/uploads/Tax-Espresso-Special-alert-Global-minimum-tax-FAQ.pdf
