The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has agreed a two-pillar solution to address the tax challenges arising from the digitalisation of the economy.
- Applies to multinational enterprises (MNEs) with global turnover above EUR 20 billion and profitability above 10% (i.e. profit before tax/revenue).
- For in-scope MNEs, between 20-30% of residual profit defined as profit in excess of 10% of revenue will be allocated to market jurisdictions with nexus using a revenue-based allocation key.
- Extractives and Regulated Financial Services are excluded.
- There will be a new special purpose nexus rule permitting allocation of Amount A to a market jurisdiction when the in-scope MNE derives at least EUR 1 million from that jurisdiction.
- Double taxation of profit allocated to market jurisdictions will be relieved using either the exemption or credit method.
- Amount A will be implemented through a multilateral instrument scheduled to be signed as of 2022 with entry into force in 2023.
- Pillar 2 is about achieving a global minimum level company tax harmonisation applies to MNEs that meet the EUR 750 million consolidated revenue threshold.
- The minimum level represents the benchmark against which the effective company tax payable in a country is assessed.
- The minimum tax rate used for these purposes will be at least 15%.
- Government entities, international organisations, non-profit organisations, pension funds and investment funds are excluded.
- Also international shipping income is excluded from the minimum taxation.
- Subject-to-Tax Rule may apply to interest, royalties and certain other listed payments that are allows source jurisdictions to impose limited source taxation on certain related party payment payments subject to tax below a nominal rate of 7.5%-9%.
- The expectation is that Pillar 2 should be brought into law in 2022, to be effective in 2023.
In October 2021 a detailed implementation plan of Pillar 1 and 2 will be finalised and published.
Please feel free to contact us if you have any questions on this subject or would like to discuss the impact of these current proposals for your company.