Will pillar two mark the beginning of the end for international tax planning?

Although nothing is set in stone until the proposals on pillar two are effectively adopted by the OECD/G20 Inclusive Framework on BEPS (IF), the global anti-base erosion model rules (pillar two) (the rules), published by the OECD on December 20 2021, give a strong sense that companies the world over will, in fact, soon have a global minimum corporate tax rate to contend with.

Pillar two is the second limb of the two-pronged approach to addressing the challenges arising from digitalisation. It is targeted at stamping out a large slice of the international tax competition which results from the application of the typical taxing rights allocation rules which are prevalent in today’s global tax treaty network.

It is proposed that this will be done by introducing a harmonised structure of taxation aimed at ensuring that multinational enterprise (MNEs) having a revenue of more than €750 million ($855 million), will be required to pay a minimum level of tax on the income arising in each of the jurisdictions where they operate by introducing a top-up tax on profits arising in a jurisdiction which is triggered whenever the effective tax rate would otherwise be lower than the stipulated minimum rate (also known as the ‘GloBE’ rules).

The GloBE rules incorporate two interlocking domestic rules, namely: (i) 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; and (ii) 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.

Pillar two also includes a treaty-based rule (the subject to tax rule (STTR)) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate which will be creditable as a covered tax under the GloBE rules.

The OECD has stated that this global minimum corporate tax, now established at a rate of 15% is intended as a fail-safe for countries to use to protect their tax bases by putting a stop to the so-called “race to the bottom”.

In brief, the rules define the scope of pillar two, determine which MNE groups and group entities will be subject to those rules (and which will be excluded) and describe the constituent entities in a group that will be liable for any top-up tax. 

They also prescribe the portion of such top-up tax, and how MNEs will ascertain the elements of the effective tax rate calculation, determine the income or loss for the period for each constituent entity, and compute the taxes attributable to such income.

They also enter into the treatment of acquisitions, disposals and joint ventures and attempt to address tax neutrality and address administrative aspects, including information filing requirements, the application of any safe harbours; as well as the co-ordination between tax administrations; and set out transitional rules for MNEs that become subject to the global minimum tax.

Malta is one of the 137 members of the IF that agreed to the ‘Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy’ by the OECD in October 2021 (the ‘statement’) – only four members having dissented.

Apart from describing the components of each of the pillars, the statement also contains the OECD’s detailed implementation plan in its two-page annex. This prescribes that a multilateral instrument (MLI) will be developed by the IF by mid-2022 to facilitate the ‘swift and consistent’ implementation of the STTR in relevant bilateral treaties. It also submits that an implementation framework that facilitates the coordinated implementation of the GloBE rules will be developed by the end of 2022 at the latest.

This implementation framework will be targeted at covering agreed administrative procedures (e.g. detailed filing obligations, multilateral review processes) and safe harbours to facilitate both compliance by MNEs and administration by tax authorities. As part of the work on the implementation framework, IF members are being asked to consider the merits and possible content of a multilateral convention in order to further ensure co-ordination and consistent implementation of the rules.

Although there is nothing to stop members of the IF from having a change of heart with regards to pillar two, this appears to be increasingly unlikely, seeing as Malta’s Finance Minister stated “[e]very country is bowing its head to the agreement […] because even if no other country agrees on it, countries can still tax the difference between what Malta taxes locally and that 15% elsewhere”.

In another article published at the end of November, a local paper reported that the 15% tax rate could impact as many as 20 of Malta's largest employers and voiced concern on some of the potential effects of this new regime.

More recently, it was reported that the Maltese government, together with the governments of some other jurisdictions are now lobbying for a delay on the introduction of the new corporate tax rate rules until at least January 2025.

Kirsten Debono Huskinson Partner, Camilleri Preziosi Advocates E: kirsten.debonohuskinson@camilleripreziosi.com  

Andrea DarmaninAssociate, Camilleri Preziosi Advocates E: andrea.darmanin@camilleripreziosi.com