The New Era for Digitalisation of the Economy: Two-Pillar Solution
Summary
Following years of negotiations and studies, on October 8, 136 out of the 140 countries of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (“IF”) has agreed on key components of the Two-Pillar solution in order to address the tax challenges arising from the digitalisation of the economy.
Key Takeaways
Pillar One
- What will it bring?
With Pillar One, a formulaic share of the consolidated profit of certain multinational enterprises (“MNE”) will be re-allocated to markets/jurisdictions where the customers and users of those MNEs are located meaning that the revenue will be sourced to the end market jurisdictions where goods or services are used or consumed.
- Scoping Rules
Pillar One will apply to MNEs with profitability above 10% (calculated using an averaging mechanism) and global turnover above EUR 20bn (to be decreased to EUR 10bn after successful implementation for seven years).
The profit to be re-allocated to markets/jurisdictions will be calculated as 25% of the residual profit before tax in excess of 10% of revenue calculated.
- The New Nexus
The new nexus defined for the taxation of Amount A in the markets will be based on revenue. A revenue threshold of EUR 1 million will apply, unless the GDP of the market country is below EUR 40bn which then establish taxation of Amount A at EUR 250,000.
- Unilateral Measures
The Multilateral Convention (“MLC”), which will be developed and opened for signature in 2022, with Amount A coming into effect in 2023; will require all parties to remove all Digital Services Taxes and other relevant similar measures.
- Other Highlights
Where the in-scope MNE are already taxed in a market jurisdiction, a safe harbor is expected for marketing and distribution profits.
In-scope MNEs will benefit from dispute prevention and resolution mechanisms, which will avoid double taxation, with an elective binding dispute resolution mechanism to be available only for developing economies.
The work on Amount B continues to be postponed to 2022.
Pillar Two
- What will it bring?
Bringing an application of a minimum effective tax rate of 15% to the profits of in-scope multinationals at the jurisdictional level; the Pillar Two proposals consist of two main elements:
- The GloBE rules which are the Income Inclusion Rule (“IIR”) and the Under Taxed Payment Rule (“UTPR”)
- The Subject to Tax Rule (“STTR”)
- Design Elements
The IIR imposes a top-up tax on a parent entity in respect of the low-taxed income.
The UTPR will the aim to ensure that the low-taxed entities pay a minimum effective tax rate of at least 15%, under a methodology to be agreed and the low-taxed entities will not subject tax under IIR level.
The STTR would apply to certain payments (royalties, interest, and other defined payments) made from a developing country to an IF member state that applies a nominal corporate tax rate lower than a minimum STTR rate of 9%. The additional tax payable would be limited to the difference between the STTR minimum rate and the tax rate that would otherwise apply to the payment.
- Scope
The GloBE rules will apply to MNEs that meet the 750 million euros threshold.
- Other Highlights
Model rules for GloBE will be developed before the end of November 2021.
Pillar Two should be brought into law in 2022, to be effective in 2023. The UTPR should be come into effect in 2024.
The STTR will progress through model treaty provision to be developed by the end of November 2021. An MLI will be developed by mid-2022 for the adoption of it within bilateral treaties.
