BEPS 2.0 - The Two Pillar approach, an overview

New nexus and profit allocation rules offering market jurisdictions new taxing rights over MNEs, whether or not there is a physical presence.

Puts a floor on tax competition between countries to offer the lowest possible corporation tax rates to attract foreign investment, through the introduction of a global minimum corporate tax that countries can use to protect their tax bases.

All MNE groups with gross revenue exceeding €20 billion and profitability above 10% (Profit before tax / revenue).

MNE groups with gross revenue of €750 million or above, in the immediately preceding fiscal year.

The key elements of Pillar One can be grouped into three components:

• Amount A (new taxing right): 25% of residual profits of MNEs (viz. profit above the 10% threshold) allocated to market jurisdictions using a formulaic approach.
• Amount B (fixed “baseline” return): For marketing and distribution functions based on arms’ length principle.
• Tax certainty Through effective dispute prevention and resolution mechanisms, applicable to all businesses

Global Anti Base Erosion Rules (GLoBE):

Designed to ensure large MNEs pay a minimum corporate tax of 15% on the income arising in each jurisdiction where they operate. Includes two interlocking domestic rules:

• An Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a constituent entity.
• An Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR

Subject to Tax Rule (STTR):

A treaty-based rule that will protect the right of countries to tax certain base-eroding payments such as interest and royalties, where they are not taxed up to the minimum of 15%.

These changes are multinational in scope and, despite simplification compared to previous proposals, remain technically complex. The scope of covered businesses has moved far from the original intention of  highly digitalized business models.

While various Draft Rules have been presented for public comments in 2022, the timing for the introduction of Pillar One is unknown and depends on its acceptance by a critical mass of jurisdictions.

Detailed commentary and illustrative rules were released in March 2022 providing guidance on the interpretation and application of the GloBE rules.

In December 2022, an implementation package was  released, which included the following:

Guidance on safe harbour and penalty relief

Public consultation document on the GloBE Information Return

Public consultation document on Tax Certainty for the GloBE Rules

Further, OECD released an administrative guidance on the Globe Rules in February 2023.

137 participating countries that have signed-up to the OECD inclusive framework for a 15% global minimum tax may choose whether they wish to adopt the OECD Pillar Two Model Rules and must accept the application of Pillar Two Rules by other countries.

Further to the above, EU has enacted global minimum tax directive that requires EU jurisdictions to enact domestic legislation for the IIR from 2024 and the UTPR from 2025. A number of other jurisdictions have published proposals for the domestic enactment of Pillar Two, with commencement from 2024.

Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions

Under Pillar Two, the global minimum tax, with a rate of 15%, is expected to generate around USD 150 billion in new tax revenues globally