PILLAR II: a technical guidance on 15% global minimum tax

On March 14, 2022 OECD/G20 Inclusive Framework on BEPS published a Commentary on the 15% global minimum tax agreed in October 2021 as part of the twopillar strategy to address the tax challenges arising from the digitalisation of the economy. The Commentary looked at how the Global Anti-Base Erosion (GloBE) Rules were agreed upon and implemented in December 2021.

Its aim is promoting consistent interpretation of the GloBE Rules, enabling for tax administrations and multinational corporations to execute the new Directive. Further,the Commentary defines the meaning of specific keywords, disclosing deep and comprehensive technical guidance on the functioning and intended outcomes of the rules. It also provides templates to demonstrate how the rules are applied. The OECD/G20 Inclusive Framework on BEPS will produce an Implementation Framework to assist tax authorities in implementing and managing the GloBE Rules after this key step. Then, the Inclusive Framework will run a public consultation to collect feedback from stakeholders on topics they believe should be addressed in the Implementation Framework.

Merely to provide some context, the GloBE Rules ensure that Multinationals with revenues over € 750 million pay at least a 15% minimum tax rate on income generated in each of the jurisdictions where they operate. It includes charging provisions that are made up of two interlocking rules, the income inclusion rule (IIR) and the undertaxed payment rule (UTPR). The IIR is applied by some parent entities in the multinational group using a sorting rule that generally prioritizes the application of the rule to entities near the top of the ownership chain (the “top-down” approach). Further, the IIR imposes a Top-up Tax.

The UTPR acts as a backup to the IIR. It denies deductions to specific Constituent Entities to the extent that a Low-Tax Constituent Entity is not subject to tax under an IIR. IIR and UTPR, when combined, work to provide a systematic solution to ensure that all MNE Groups in scope pay a minimum level of tax on profits in excess of a routine return in the jurisdictions in which they operate.

Impact of Pillar II for businesses

It is clear that every country has its own jurisdiction and therefore each consequence of the GloBe rule can differ because of it. Anyway, it is necessary focus on some business aspects that could be involved due to the implementation of this new regulation.

A first implication to be looked at is certainly the GAAP difference in recognition of revenues, which may result in a jurisdictional ETR lower than the 15% threshold. Unless they are temporal differences then easily negotiable. To the extent, however, that they are permanent or nearly permanent, then they cannot be addressed. Another factor to consider is the location of existing activities on assets, business services, and operations, as there will be a formulaic substance-based carve-out for computing the jurisdictional top-up tax. Further timing differences can have a strong impact in terms of Deferred tax, consequently this bring to believe that will be repercussions in future investment decisions. As a result of all these issues, corporations will need to evaluate potential increasing tax costs, which would erase or neutralize the benefit of low rates or incentives received by the group in several countries, necessitating a review of group structure. Last but not least, consider the additional compliance load.

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