Global minimum tax rate: OECD publishes detailed rules

The model rules, published by the Organisation for Economic Cooperation and Development (OECD), form part of the second pillar of the proposed two-pillar solution to address the tax challenges of the digitalisation of the economy, as agreed by 136 countries in October. Pillar two of the OECD plan is the so-called Global Anti-Base Erosion (GloBE) rule, which is designed to ensure that large multinational enterprises pay a minimum level of tax of 15% on the income arising in each jurisdiction where they operate.

Countries are not obliged to introduce pillar two into their own domestic laws. However, if they choose to do so, they must implement the rules in accordance with the model rules, to ensure that pillar two is brought into force in a consistent and coordinated way.

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration described the model rules as “a significant building-block in the development of a two-pillar solution, converting the foundations of a political agreement reached in October into enforceable rules”.

The rules will apply to multinationals with consolidated revenues of at least €750 million in at least two out of the last four years. Multinationals with revenue above the threshold will have to calculate their effective tax rate for each jurisdiction where they operate and pay top-up tax on the difference between their effective tax rate per jurisdiction and the 15% minimum rate. A ‘de minimis’ exclusion applies where there is a relatively small amount of revenue and income in a jurisdiction. Any resulting top-up tax is generally charged in the jurisdiction of the ultimate parent company if that jurisdiction has implemented the necessary taxing rules. If not, the model rules set out which group entity pays the top-up tax.

The provisions for calculating the effective tax rate take into account timing differences, broadly using the deferred tax accounting method.

The pillar two model rules also address the treatment of acquisitions and disposals of group members and include specific rules to deal with particular holding structures and tax neutrality regimes. They also address administrative aspects, including information filing requirements, and provide for transitional rules for groups that become subject to the global minimum tax.

Countries that adopt the GloBE rules are not required to introduce domestic top-up taxes on their own resident taxpayers but may choose to do so. If they do so, this will reduce the amount of top-up tax that may be payable in another jurisdiction, preserving the primary taxing rights for the jurisdiction where the income arises.

Corporate tax expert Eloise Walker of Pinsent Masons said: “Realistically, you would expect domestic revenue authorities to fall over themselves in their keenness to increase their effective tax rate to 15%, especially if they can blame it on a ‘global consensus’ engineered by the OECD. If you are going to adopt GloBE anyway, you are not going to hand over that extra revenue to another country.”

In early 2022, the OECD plans to release a commentary on the model rules and address the co-existence of the rules with the US Global Intangible Low-Taxed Income (GILTI) rules. President Biden’s administration has proposed changes to the GILTI regime that would better align it with pillar two, including applying it on a country-by-country basis and ensuring the US effective statutory rate on foreign-source income is at least 15%.

Pillar one of the OECD deal aims to ensure a perceived fairer distribution of profits and taxing rights among countries with respect to the largest multinationals. Multinational enterprises with global turnover above €20 billion will be subject to tax on a proportion of their profits in the countries where they operate. Pillar one is not as far advanced as pillar two, with model rules not due until early 2022.

“We will have to wait and see where pillar one ends up, and how it will interact with pillar two,” said Walker. “It is inevitable that we are in for a period of further disruption as this sea-change in international rules unfolds.”