On the 20th December 2021, the Organisation for Economic Co-operation and Development (the “OECD”) issued a press release and published the Global Anti-Base Erosion Model Rules (Pillar Two) (the “Rules”) in relation to the domestic implementation of a 15% global minimum corporate tax rate. This aim is to mitigate a number of tax challenges which come to light as a result of the digitalisation and globalisation of the economy.
The Rules contribute towards a harmonised structure of taxation aimed at ensuring that multinational enterprise (“MNE”) groups having a revenue of more than Euro 750 million, pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. This is done by implementing a top-up tax on profits arising in a jurisdiction whenever the effective tax rate is lower than the minimum 15% rate.
In light of the above, the Rules:
- Define the scope and determine which MNE Groups and Group Entities are subject to the Rules and which are to be considered as Excluded Entities and are therefore not subject to the Rules;
- Determine the constituent entities in the group that are liable for any top-up tax and the portion of such top-up tax;
- Ascertain the elements of the effective tax rate calculation, determine the income or loss for the period for each constituent entity, and compute the taxes attributable to such income;
- Aggregate the income and taxes of all constituent entities located in the same jurisdiction to calculate the effective tax rate for that jurisdiction. If such rate is below the 15% minimum, the difference will result in a top-up tax percentage to the jurisdictional income in order to calculate the total amount of top-up tax. The top-up tax is distributed pro-rata amongst the constituent entities located in that jurisdiction and then charged to the constituent entities liable for any top-up tax. The Rules also include an elective substance-based income exclusion that may reduce the amount of profits subject to any top-up tax;
- Address the treatment of acquisitions, disposals and joint ventures;
- Address certain tax neutrality and other distribution regimes;
- Address administrative aspects, including information filing requirements, the application of any safe-harbours; as well as the co-ordination between tax administrations; and
- Set out transitional rules for MNEs that become subject to the global minimum tax.
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