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Some of Europe's brightest legal minds look at the tax issues across Europe which could impact multinational businesses.

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Global minimum tax model rules

The model rules for Global Anti-Base Erosion (GloBE) (a.k.a. Pillar Two of international tax reform) set a template for a jurisdictional-level corporate minimum tax system applying a minimum effective rate of tax (ETR) of 15%. This is expected to generate around USD 150 billion in additional global tax revenues per year, partly through the application of the rules themselves, but also from behavioural change.

Although the aim of Pillar Two is simple, seeking to place a limit on tax competition for large MNE groups, it achieves this with a series of complex and interlocking rules. The detailed design and the nuts and bolts of how the rules will operate in practice (and their order of priority and interaction with domestic rules) were lacking from the international agreement in principle.  Then on 20 December model rules  for some key parts of Pillar Two were published together with a press release, the OECD’s 5-page summary, FAQs and fact sheets.  Other parts of Pillar Two will follow next year.

Substance-based income exclusion

The formulaic substance-based carve out in Chapter 5 takes a fixed percentage of some tangible assets and payroll costs out of the calculation of excess profit for calculating the top-up tax and the definitions are key to the scope of this carve out. Eligible payroll costs are defined broadly as “employee compensation expenditures” including salary and wages, health insurance, pension contributions, and payroll and employment taxes and employer social security contributions.

Eligible tangible assets include items located in a jurisdiction, such as property, natural resources, a lessee’s right to use tangible assets, and certain government licenses, including ones to exploit natural resources. It is hoped that the commentary, when it is produced, will answer any remaining questions on precisely what is intended to be included or not included in these key definitions.

Temporary timing differences

Income (or loss) is calculated based on financial accounts, but concerns had been expressed at how temporary differences arising when income or loss is recognised in a different year for financial accounting and for tax would be dealt with.  Chapter 4 of the model rules leverages the deferred tax accounting rules already used by most businesses to reconcile these temporary differences although with modifications including a five-year recapture mechanism which limits how long items can be deferred, for example provisions for uncertain tax positions. Certain types of gains and costs can be deferred without the five-year restriction including research and development expenses and foreign currency exchange gains.

A simplified loss carry-forward equivalent may be elected for instead of applying the deferred tax accounting rules – this will provide appropriate recognition of losses arising in no or low tax jurisdictions.

Interaction with controlled foreign company (CFC) rules

Putting aside for now the question whether CFC rules would continue to be necessary in a world with restricted tax competition, both domestic taxes and foreign taxes on a company’s profits are included in the covered taxes when calculating ETR.  So taxes paid under CFC rules further up the chain will be taken into account in the country in which the CFC is located.

What about tax losses incurred prior to introduction of GloBE rules?

There is a transitional rule to ensure that an MNE will not be subject to minimum tax simply because they have used a tax loss which arose prior to the effective date of the GloBE rules.

Domestic changes prompted by GloBE rules

Will we now see a trend of domestic rules implementing minimum tax rules or increasing tax rates so as to ensure any additional tax goes to the jurisdiction where the income arises rather than another jurisdiction?   Ireland has already announced an increase in corporate tax rate to 15% for large companies in scope of Pillar Two and other jurisdictions (such as Spain) are considering introducing a domestic minimum tax rule.  The GloBE rules provide that any domestic minimum top up tax applied where the income arises will be credited against the top up tax under the GloBE rules if the domestic top-up meets certain conditions.

EU approach

A draft directive to implement Pillar Two in the EU is expected to be published shortly.  A key expected difference from Pillar Two is that there will be no cross-border element in the EU version – the GloBE rules will be extended to subsidiaries and constituent entities in the same member State as the parent in order to avoid discrimination and to be compatible with EU rules.  The EU’s administrative procedure and safe harbour details will follow in 2022 once the OECD releases these.

Promised for 2022

There’s a lot of detail to work through in this first tranche of technical rules but we have to wait until early 2022 for guidance on the interpretation of the model rules. Details of the interaction with US GILTI rules (which is dependent on whether changes to GILTI are successfully enacted by the US to align it with Pillar Two) are also expected early 2022. 

In February, a public consultation will be held on the implementation framework dealing with administrative, compliance and co-ordination issues.  The work on the implementation framework includes the development of safe harbours to limit the compliance and administrative burden for those aspects of an MNE’s operations that are likely to be taxed at or above 15% on a jurisdictional basis.

The model provision for the subject to tax rule which allows developing countries to apply a minimum rate of withholding tax on certain payments to related parties, such as interest and royalties, in their treaties with developed countries is expected to be released in early 2022 and there will be a public consultation on this rule in March. The multilateral instrument for its implementation is expected to be developed by mid-2022 to facilitate swift and consistent implementation of the rule in relevant bilateral treaties.

2022 will be a busy year for anyone following international tax reform as the multilateral convention to implement the reallocation of taxing rights of some of the profits of the largest and most profitable MNEs to market jurisdictions under Pillar One is also promised together with other Pillar One outputs.  Implementation of the new rules is "envisaged by 2023" but it would not be surprising if the timetable slips given the amount of work still required on both Pillars.

The rules run to about 45 pages with another 15 pages of definitions. They are drafted as model rules that provide a template that jurisdictions can translate into domestic law, which should assist them in implementing Pillar Two within the agreed timeframe and in a co-ordinated manner.


slaughterandmay, zandrews, international tax reform, pillar two, oecd, global minimum tax