The Latest Trends in Corporation Tax

Over the past decade there has been a movement to form a global international tax policy following the adoption of the 15 Action Plans of the OECD Base Erosion of Profits Shifting (BEPS) framework. Many of Action Plans, designed to tackle perceived abusive tax practices, have largely been incorporated into domestic tax legislation by member participants.  In 2021, members of the OECD/G20 Inclusive Framework on BEPS (IF) reached agreement for a two-pillar solution to address the tax challenges arising by the global digital economy.

Pillar 1 focuses on rules for reallocating profits to market jurisdictions.

Pillar2 is designed to ensure that income is taxed at the appropriate tax rate by proposing to introduce a minimum global tax rate of 15% and has several complicated mechanisms to that this tax is paid.  It will affect multinational enterprises (MNEs) with a turnover of more than Euro 750 million. The rules are complex and will require the finance teams to collate new data within their organisation.      

The IF has released a series of agreed model rules documents including Model Global Anti-Base Erosion Rules (GloBE), Commentary on the GloBE Rules, guidance on GloBE Safe Harbours and Administrative Guidance, a standardised GloBE Information Return. These documents serve as templates for jurisdictions to incorporate pillar 2 into their domestic laws for its coordinated implementation within the agreed timeframe. 

The core elements of Pillar Two are :

• An Income Inclusion Rule (IIR)
• An Undertaxed Profits Rule (UTPR)

Under the IIR, where an entity’s ETR in any jurisdiction is below the minimum 15% rate, the

ultimate parent entity is primarily liable for a ‘top-up tax’ to bring the rate up to 15%.

As a backstop, the UTPR can apply, through allocation of a top up tax to a sibling entity in

respect of profits which are not subject to the charge under an IIR.

A country may also choose to implement a Qualified Domestic Minimum Top-up Tax

(QDMTT), alongside the IIR. This would enable the relevant territory to retain taxing rights in

respect of low taxed profits (rather than the relevant profits being tax in the parent entity’s

jurisdiction under IIR or a sister jurisdiction under UTPR).

The calculation mechanism for determining the effective tax rate is broadly the same under all three elements. It blends elements of current and deferred tax in determination of the ETR and therefore, requires understanding of international tax principles as well as deferred tax accounting in undertaking the calculations.

Another core element of the Pillar 2 is the multilateral instrument on the subject to tax rule (STTR MLI) to facilitate the implementation of Pillar 2. This is a treaty-based rule which allows the source (or payor) jurisdictions to impose additional tax on several categories of cross-border intragroup payments when such payments are subject to a nominal corporate income tax rate of below 9% in the residence (or payee) state and is expected to be most beneficial to developing countries.

The MLI will allow the STTR rule to be included within the existing bilateral agreement

without the need to make any amendments to those treaties provided that both jurisdictions to the treaty sign up to the MLI. The MLI is currently open for signature, and it is yet to be seen how many jurisdictions will sign up to it.

Timeline for implementation

Many member countries have opted to implement the IIR first with many countries legislating for implementation from 1 January 2024 (accounting periods beginning on or after 31 December 2023). Implementation of the UTPR is expected to follow 12 months later i.e. from 1 January 2025 at the earliest. Several territories have now legislated for QDMTT with commencement date generally aligned to the IIR to protect domestic taxing rights.

The global minimum tax is already a reality where several jurisdictions have either issued final/ draft legislations or have set clear intentions of enacting such measures. Talking about key jurisdictions, all European Union (‘EU’) members have accepted to implement pillar 2 measures. Basis the EU directives, countries like Germany and Netherlands have already issued draft regulations. United Kingdom in July 2023 has enacted the legislation to bring in effect Qualified Domestic Minimum Top-Up Tax (‘QDMTT’) and Income Inclusion Rule (‘IIR’) for fiscal years starting on or after 31 December 2023 and Undertaxed Payments Rule (‘UTPR’) from 31 December 2024. For India headquartered MNE Groups having parent entities in EU or United Kingdom, the relevant fiscal year from which GloBE rules would become applicable would be from 1 April 2024. Moving towards East, Japan, South Korea have already enacted legislation wherein both these countries would be implementing IIR beginning 2024. Now, drawing our attention to some of the common holding jurisdictions, Mauritius has introduced QDMTT, however, its expected date of implementation is yet unclear. Singapore and Hong Kong in its budget had announced its plan to implement GloBE (IIR and UTPR) and Domestic Top-up Tax

Impact of Pillar 2

These rules will have a comprehensive impact on tax, finance and IT teams, as well as senior management and stakeholders to ensure data is collected accurately and legislation is implemented, and tax policy disclosed.  Assessment will need to be made on various factors including evaluation of effective tax rates, identifying risk areas which will require attention, the group and operation structure of the organisation, allocation of resources, implementation of technology to collate and analyse data the risks allocated with cash outflows and tax transparency.

The implementation of the BEPS Action Plans has impacted all tax advisors involved in cross-jurisdiction advice.  Although the implementation of Pillars 1 and 2 this far applies to MNEs, the trend is to shift to an agreed set of global tax rules to protect individual country’s tax base.

Viraj Mehta 

BOURNER BULLOCK - United Kingdom