On 8 October 2021, the Organization for Economic Cooperation and Development (OECD) / G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released a statement on the two-pillar solution which states the agreement of 136 out of 140 Inclusive Framework members on core design features developed in the BEPS 2.0 project. The decision has received support from major economies including the United Arab Emirates, the Kingdom of Saudi Arabia, Qatar, Bahrain and Oman.
The announcement reflects the progress made by the OECD on the two pillar solution to overcome the tax challenges arising from the digitalization of the economy.
IMC Group has deeply analysed the statement and has summarised the new components agreed by the IF members for Pillar One and Pillar Two. Our alert also summarises the implementation plan for the same.
Agreed Components of Pillar One
The October statement is a build on the July statement that focuses on the conceptual agreement on fundamental reforms to international tax rules. Furthermore, it provides clarity on certain key parameters. IF further provided clarification in regard to Amount A and confirmed completion of technical work for the application of Amount B by the end of 2022. The new agreed components are as follows:
Amount A
- Scope: The scope of Amount A is restated without any change. It states that Multinational Enterprises (MNEs) with global turnover above EUR 20 billion and profitability above 10% are within the scope of Pillar One rules. The calculation of turnover and profitability shall be done using an averaging mechanism.
- Allocation: October statement amended the previously defined residual profit allocation from 20% and 30% range to 25%. This means MNEs will now reallocate 25% of their residual profit (profit in excess of 10% of revenue) to market jurisdictions.
- Tax certainty: A mandatory and binding dispute resolution mechanism will be in place for all issues pertaining to Amount A. For a few developing countries, an electivebinding dispute resolution mechanism will be in place. The eligibility conditions to access this mechanism will be reviewed on a regular basis.
- Unilateral measures: The multilateral convention (MLC) through which Amount A is to be implemented requires the removal of all Digital Services Taxes and other relevant similar measures to all companies. Furthermore, no new measures are to be imposed on any company from 8 October 2021 until 31 December 2023 or the coming into force of the MLC.
Amount B
The statement clarifies that the application of the arm’s length principle to in-country baseline marketing and distribution activities will be simplified and streamlined. There will be a specific focus on the needs of low-capacity countries. The said work shall be completed by the end of 2022.
Agreed Components of Pillar Two
Pillar Two consists of two interlocking domestic rules, an income inclusion rule and an undertaxed payment rule as well as a treaty-based rule for the benefit of developing countries. The new components in pillar Two are as follows:
- Rate: The Inclusive Framework has agreed that a global minimum tax rate shall be 15% calculated on a country by country basis. The phrase “at least” has been removed from the statement.
- Scope: The rules will apply to MNEs that meet the EUR 750 million thresholds.
- Undertaxed Payment Rule (UTPR) exclusion: MNEs that have a maximum of EUR 50 million tangible assets abroad and operate in less than 5 other jurisdictions are excluded for a period of 5 years from the application of the UTPR.
- Effective Tax Rate (ETR) calculation: The earlier provided timeframe of 3 to 4 years has now been revised to 4 years for existing distribution tax systems earnings. The ETR calculation however remains unchanged.
Substantial activity exclusion: Certain incomes earned by MNEs are excluded from the computation of the ETR. The same is calculated at 5% based on a percentage of its tangible assets and payroll expenses. The term “at least” has been removed. The conditions for exclusion are as follows:
– The transitional period has been increased to 10 years.
– Exclusion amount is 8% of the carrying value of tangible assets and 10% of payroll. The same will be reduced annually.
De minimis exclusion: Furthermore, if MNE has revenue less than EUR 10 million and has profits less than EUR 1 million, a de minimis exclusion will also be applicable.
- Subject to tax rule (STTR): The STTR has been fixed at 9% from the previously mentioned range between 7.5% and 9%.
Implementation Plan for Pillar Two
The statement also highlighted the implementation plan for pillar two which is as follows:
- Pillar Two is anticipated to be brought into law in 2022 and will be made effective in 2023, with the UTPR coming into effect in 2024.
- Model rules to give effect to the GloBE rules will be developed by the end of November 2021. It will define the scope and set out the mechanics of the GloBE rules.
- Model tax treaty provision for the STTR and commentaries will be made effective by the end of November 2021. A multilateral instrument will be developed by the IF by mid-2022 to facilitate the smooth implementation of the STTR in relevant bilateral treaties.
- A detailed implementation framework will be developed by OECD by the end of 2022 to facilitate coordinated implementation of the GloBE rules.
End Note
With the new statement coming into effect, the tax and finance teams need to stay abreast with the changes in the existing tax landscape. They need to access the potential challenges the businesses are likely to face.
How Can IMC Group Help?
IMC Group is keeping a tap of all the changes that are happening from time to time. We can help you prepare an effective roadmap to sail through these changes.
Our international tax team can also assist you in determining the applicability and potential impact of Pillar One and Pillar Two on your business and how to go about its implementation.
For further information, get in touch with us now!
