Overview
Sarah Gabbai, tax attorney at law firm McDermott Will & Emery, said:
“The goal of Pillar 2 is to counter BEPS and harmful tax competition by having multinationals identify low-tax jurisdictions within their groups and charge a top-up tax with respect to each low-tax jurisdiction to achieve the applicable minimum tax rate. There are two minimum tax rates being proposed: a 15% global minimum tax per jurisdiction, calculated according to a new set of global anti-base erosion rules (GLoBE rules) and generally imposed at the level of the appropriate parent under a broad-based income inclusion rule (IIR), and a 9% minimum rate of withholding tax on payments made between connected entities. The recently-published Commentary to the Model GLoBE Rules contains detailed guidance on how to calculate the former, with illustrative examples for particular scenarios. It also includes a plethora of detailed rules, with illustrative examples, on the various ways in which the IIR may be implemented within groups, with the Undertaxed Payments Rule (UTPR) acting as a backstop. The IIR is effectively like a very broad CFC rule, while the UTPR denies an appropriate amount of deductions to achieve the required top-up tax where an IIR is not available.
A notable feature of the 15% minimum tax is that it will likely nullify the benefit of existing local incentive regimes, since those regimes will likely push the tested jurisdictional ETR below the 15% minimum rate, thus generating a top-up tax. Where a group receiving such an incentive also has a GloBE loss, affected groups may need to consider whether they can avail themselves of a loss carryforward mechanism under the GLoBE rules to offset the impact of this. The Commentary cites this loss carryforward mechanism as being particularly useful for jurisdictions which either do not have a corporate income tax (CIT) or impose a very low rate of CIT, since loss-making constituent entities in such jurisdictions can elect to treat those losses as a “covered tax” (in the form of a deemed deferred tax asset at the 15% rate) for a subsequent fiscal year in which the entity is profitable, thus potentially eliminating the need for a top-up tax for that year.
What the Commentary shows is that the OECD’s recent focus has been on the technical calculation components of the 15% minimum tax, with guidance on the remaining aspects of Pillar 2, including the 9% minimum withholding tax, to be released by the OECD at a later date in the coming months. With many moving parts still to come, Pillar 2 still feels very much like a theoretical exercise, even though it will have very real compliance and administrative consequences, with little time for multinational groups to prepare for the changes. Ultimately, Pillar 2 will only start to make more sense once we know which Inclusive Framework (IF) jurisdictions intend to implement the IIR and/ or the UTPR – particularly as IF jurisdictions are not obliged to adopt the GLoBE rules – and whether the U.S. GILTI tax will be considered compliant with the GLoBE rules or modified to be so. It also remains to be seen which IF jurisdictions will implement a qualified domestic minimum tax, which one would expect to substantially offset the global 15% top-up tax. While this is ultimately a policy decision for the relevant government of the low-taxed jurisdiction in question, it would be reasonable to assume that countries with local reliefs and incentives may be more likely to introduce a domestic minimum tax than those which either do not have a corporate income tax (CIT) or impose a very low rate of CIT.
An EU Directive to implement Pillar 2 is also in the works, meaning that all Member States will be required to implement Pillar 2 as a minimum standard to the extent they haven’t already done so. This is set to enter into force some time this year, with the latest draft now stating the IIR to take effect from 31 December 2023 and the UTPR from 31 December 2024. In the interests of proportionality, the Directive will allow Member States with fewer than 10 ultimate parent entities of MNE groups to elect not to apply the IIR or UTPR for an initial 2-year period, although the making of such an election would mean that Member States in which the relevant MNE’s other group members are located would need to apply a top-up tax under the UTPR. In-scope MNE groups in the early stages of international expansion will also be allowed an initial 5-year phase-in period from 31 December 2023 for the IIR and from 31 December 2024 for the UTPR, during which the top-up tax may be reduced to zero.”
