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.
ARE ANY INDUSTRIES EXCLUDED FROM THE GLOBAL MINIMUM TAX?
1. The Global Minimum Tax applies fairly broadly. At this stage of negotiations it appears that global shipping is likely to be excluded. Fund vehicles subject to certain conditions are also likely to be excluded.
2. It will be necessary to consider the applicability of exclusions on a case-by-case basis. Other industries are generally in scope of the Global Minimum Tax.
3. Pillar One, which as outlined above is different from the Global Minimum Tax, currently excludes regulated financial services and extractives.
WE CURRENTLY BENEFIT FROM TAX INCENTIVES THAT ARE OFFERED UNDER STATUTE OR HAVE BEEN GUARENTEED BY PARTICULAR TAX AUTHORIIES, CAN WE STILL BENEFIT FROM THESE?
1. The Global Minimum Tax itself should not directly alter any tax incentives that are offered under domestic laws. However, where a tax incentive results in a group falling below the Global Minimum Tax rate, top-up tax could apply. This may have the effect of reducing or eliminating the benefit of the incentive.
2. Whether incentives continue to be useful may partly depend on the effective tax rate of a group prior to utilizing the incentive. For example, if the effective tax rate of a group in a particular jurisdiction is 30% before opting into an incentive, but 16% after utilizing the incentive, no top-up tax would be applicable, assuming a Global Minimum Tax rate of 15%.
3. If the starting effective tax rate was 16.5% and it were subsequently reduced to 8.25% by an incentive, the global minimum tax could then apply to increase the effective tax rate to 15%, which would nullify the majority of the benefit provided by the incentive.
4. While the introduction of the Global Minimum Tax itself should not directly interfere with domestic tax law, we anticipate a number of jurisdictions will respond to the tax by amending their own laws. Accordingly, it is possible that certain incentives may be discontinued by jurisdictions, or jurisdictions could introduce their own domestic minimum taxes that could override incentives.
WHEN WILL THE GLOBAL MINIMUM TAX BE EFFECTIVE?
1. The Global Minimum Tax is intended to be effective in 2023.
2. The IIR, in theory, can be introduced with only changes to domestic law. Provided there are no political stumbling blocks, a 2023 timeline could be achieved.
3. The UTPR is still under development. However, we understand that its final form is likely to be implementable through domestic law changes only. However, its introduction may be deferred. If the UTPR is deferred, it may become effective in 2024, 2025 or 2026.
4. The STTR, which is a treaty based rule, allows a jurisdiction to deny treaty benefits in certain circumstances and will impact the operation of treaties. Therefore, its implementation would require a multilateral instrument. While the drafting of such an instrument and in-principle agreement can be achieved relatively quickly, we have observed delays in ratifying the previous multilateral instrument that was used to implement certain minimum standards in the OECD's previous BEPS project.
5. A significant coordinated effort will be required to implement the STTR in order for it to be effective in 2023.
OUR GROUP HAS TAX LOSSES IN A NUMBER OF JURISDICTIONS, DO THESE COUNT FOR MINIMUM TAX PURPOSES?
1. The availability of losses incurred prior to the implementation of the Global Minimum Tax and the basis under which they are recognized is still uncertain. In particular, it is unclear whether the losses will be limited based on a particular lookback period, whether they may be limited to operating losses only and whether they will be calculated based on local tax law or the Global Minimum Tax rules.
2. If local tax losses are available, but they are not recognized for the purposes of the Global Minimum Tax, groups may be required to pay top-up tax which could partially or entirely offset the benefit of the tax losses.
OUR HEAD OFFICE LOCATION ALREADY APPLIES CFC RULES, COULD THE IIR STILL APPLY?
1. While the IIR is similar to a CFC rule, there are very few limitations to the IIR meaning it may apply more broadly than certain CFC rules. For example, the IIR applies irrespective of the level of substance or activity that a group operates within a jurisdiction. Albeit, some relief will be provided with an exclusion of at least 5% of tangible assets and payroll. This exclusion will be at least 7.5% during a 5-year transition period.
2. The IIR could be still significant even where groups are already subject to CFC rules.
Source:
https://amcham.com.my/wp-content/uploads/Tax-Espresso-Special-alert-Global-minimum-tax-FAQ.pdf
