The global minimum tax proposed by the OECD is nearing implementation following the latest round of negotiations. The OECD has managed to strong-arm Ireland, Estonia and Hungary to support the two pillar deal meaning all 27 EU member states are now on board. Four countries (Sri Lanka, Pakistan, Nigeria and Kenya) remain on the periphery and have not signed the deal so far. Even for those that have endorsed the proposals, there remains a challenging path to actual implementation, not least the obstacle of passing the deal through US Congress.
The statement setting out a “Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy” published on 8 October 2021 offers little by way of further detail. Many will be familiar with the two pillars, however by way of recap the first pillar introduces new profit allocation rules and taxing rights to market jurisdictions and the second pillar introduces a global minimum tax. Without the full instructions, there are many unanswered questions on the table, most significant of which is how exactly the profit base will be calculated for the effective tax rate under the global minimum tax.
The full design is now anticipated to be published at the end of November, leaving little time to get to grips with the rules before they are due to be implemented in 2022 to take effect by 2023. The key changes in the new statement can be summarised as follows:
- An averaging mechanism will be introduced into the test used to determine whether multinational enterprises (MNEs) are in scope, however there is no indication over what period of time will be used.
- The amount of residual profit allocated to market jurisdictions has been agreed to be 25% of profits in excess of a 10% margin (it was previously set at an undefined range of 20%–30%).
- The agreement prohibits territories under the agreement from introducing any new digital services tax (or similar measures) until the earlier of the rules becoming live or 31 December 2023. The definition of what constitutes “similar measures” remains undefined.
- The global minimum tax rate has been agreed at 15%, removing the risk that countries could have introduced the rules with a higher rate. This is a major win for Ireland who battled on this point, and in contrast to the original Biden proposal of 21%.
- The substance based carve out has survived negotiations meaning the rules will exclude an amount of income equal to 5% of the carrying value of tangible assets and payroll. A more beneficial rate is offered initially that provides relief at a rate of 8% for tangible assets, and 10% for payroll costs, reducing to 5% over a 10 year period.
- For distribution based tax systems, it has been clarified that there will be no top-up tax liability if earnings are distributed within four years, previously a period of between three to four years had been stated.
- The rate of tax used in the Subject to Tax Rule has been agreed at the upper end of 9% (a range of 7.5%–9% was under discussion).
- A new safe harbour from the Under Taxed Payment Rule (UTPR) has been introduced for expanding MNEs in the initial phase of their global expansion. Implementation of the UTPR has been deferred until 2024.