Facing pillar two head on – the top questions circling across Asia
As organisations prepare for the implementation of the GloBE rules, Jonathan Culver and Amelia Teng of Deloitte provide a guide to the main issues confronting companies.
The OECD Global Anti-Base Erosion (also known as ‘GloBE’ or ‘pillar two’) rules for the 15% global minimum tax are set to be implemented by a number of countries in the coming year. This article explores some of the key questions being posed.
What is the timeline for implementation and how do countries’ individual approaches have an impact on multinationals?
When the Inclusive Framework of 140 countries agreed in 2021 to the two-pillar solution, the blueprint called for a ‘common approach’ for countries to adopt the GloBE rules. This is due to the GloBE rules being a unilateral measure and means that countries can choose when, and whether, to implement the rules, though where they choose to do so, this should be aligned with the OECD rule set.
The goal of the Inclusive Framework was for adoption of the Income Inclusion Rule (IIR) in 2023, though it was recognised that this is subject to the complex task of incorporating the rules into domestic legislation. The Undertaxed Payments Rule (UTPR) was intended to have a 12-month delay due to the additional complexity of applying allocation keys between entities that are not necessarily related via a direct ownership interest.
Importantly, the GloBE rules apply an ordering regime between a qualified domestic minimum top-up tax (QDMTT), the IIR and the UTPR, which means that top-up tax will end up payable on low-taxed group profits even if only one country where an organisation is located has introduced it as law. As such, countries which adopt first, or earlier than other countries, will be enabled to collect top-up tax in respect of group entities located in other jurisdictions.
Adoption of a QDMTT will similarly prevent any low-taxed profits of entities within a country from being subject to an IIR or a UTPR elsewhere, and, as such, there is a clear incentive for countries with territorial tax systems or tax incentive regimes to implement a QDMTT at the same time as other countries implement an IIR.
The timing of implementation by countries will therefore impact multinational organisations, which could experience a mix of IIR, QDMTT and UTPR application, and the relative timing may also create tax competition depending on headquarter locations. This is most evident in the current discussion regarding South Korea, which could be on course to introduce its UTPR a year earlier than most other jurisdictions would have expected, in 2024. If it were to do so, it could mean that South Korea would end up collecting large swathes of top-up tax from entities located in South Korea, but in respect of the low-taxed profits of entities in other jurisdictions if they are not yet subject to an IIR or a QDMTT.
A less controversial example might be that of a consolidated accounting group that is UK headquartered with a Singapore holding company for its Asia holdings. For income years beginning January 1 2024, the group can expect to be subject to the IIR in relation to its subsidiary profits (subject to local QDMTTs), and the QDMTT for its UK profits. Any low-taxed profits in Singapore would be topped up to 15% collected in the UK.
By contrast, a Singapore-headquartered group may not be subject to the rules at all for 2024, representing a competitive advantage over its peer, as Singapore anticipates it will not implement the rules until 2025 and the UTPR (potentially applicable in other subsidiary jurisdictions) should similarly only begin in 2025. In 2025, assuming Singapore has implemented then, both groups would become subject to QDMTT, meaning the UK-headquartered group will experience a rule change and any tax collection would shift from the UK to Singapore (with regard to Singapore profits).
While conceptually the same group profits will be subject to the rules in 2024 and 2025, the application of different sets of legislation, with a potential for different interpretation and administration, could pose a practical challenge for organisations.
What are some of the implications of QDMTTs?
QDMTTs effectively override the unilateral top-down approach of the GloBE rules implemented through IIRs. They are a means of allowing the governments of low-tax jurisdictions to collect top-up tax revenues locally and in a manner that is consistent with the GloBE computation. In effect, QDMTTs are a local implementation of what was intended to be a global rule set.
Accordingly, one implication of QDMTTs is that they create a tax filing and payment obligation in the local jurisdictions. Work continues on guidance for the implementation of QDMTTs to confirm whether this will be a direct shift of the obligations from the ultimate parent entity jurisdiction, or a replication of compliance. Previously, local tax and finance teams may have viewed the GloBE rules as a head office project. However, under a QDMTT, they will likely be burdened with the responsibility of filing and paying any top-up tax and may also be dragged into computational matters.
Recently, a number of jurisdictions have published draft legislation to implement the GloBE rules and QDMTTs. The purpose of this legislation is to execute the necessary task of transcribing the agreed-upon rules into local law. However, this task is easier said than done.
While the GloBE rules are less than 100 pages in length, they come with voluminous and rapidly evolving Agreed Administrative Guidance. As jurisdictions move to implement their own laws, they have referenced and interpreted this guidance and, in some cases, incorporated this into their local implementation. This has already led to divergences between proposed local implementations and the original rule set and as more jurisdictions seek to interpret the lengthy guidance, these divergences are likely to increase.
Therefore, another implication of QDMTTs is that they will bring a greater degree of divergence and complexity to the implementation of the GloBE rules. Each jurisdiction will have a slightly different set of rules, and groups will have to comply with all of them, rather than one consistent set of rules applied by the IIR jurisdiction.
In localising the QDMTT rules, it was decided that taxes collected under a controlled foreign companies (CFC) tax regime need not be treated as covered taxes. This is different to the normal position under the GloBE rules, where CFC taxes can be allocated to low-tax jurisdictions and are treated as covered taxes. However, jurisdictions wishing to implement a QDMTT argued that the allocation of CFC taxes would erode their right to collect the minimum 15%, which would undermine the policy intent of CFC.
It follows that a third implication of QDMTTs is that groups that already pay CFC taxes may end up paying more tax than under the normal GloBE rules. Jurisdictions that impose CFC taxes will also have difficult policy decisions to make, such as whether they should provide a credit for top-up tax collected under a QDMTT. Questions of how to implement any such policy will also arise, as the proposed filing timeline under the GloBE rules is generally later than domestic filing timelines, meaning that the amount of QDMTT to provide a credit for may not be known when computing the amount of CFC tax to pay.
Issues relating to QDMTTs are only just beginning to emerge and are likely to be a source of complexity for years to come.
Many organisations are assembling their teams to plan their way towards the expected 2024–25 implementation dates but how do priorities differ?
The implementation priorities of an organisation might differ depending on the headquarter jurisdiction of an organisation and the location of its constituent entities.
For those located or headquartered in a higher tax rate jurisdiction with minimal incentive regimes, there may be an expectation of minimal top-up tax to be paid post GloBE. This assumption may be validated via a modelling assessment and designing a system to monitor the steady state and factor in the impact of future changes to the group, such as M&A activity.
For such organisations, the current priorities are likely to be focused on designing a compliance strategy and implementing systems that will feed into financial reporting and tax compliance obligations. This is a significant practical burden that is likely to require substantial resources from an organisation over the short to medium term.
Where an organisation is located or headquartered in a jurisdiction that currently provides tax incentives, or is not expected to implement the GloBE rules in the near future, it may be more imperative to review the corporate structure to identify mitigation strategies to prevent tax leakage so that the organisation can remain competitive with its peers in similar locations. A strategic tax review of holding structures, supply chains, financing and IP may feature in the priorities for this organisation type.
Such focus will likely involve greater investment in learning and keeping abreast of global developments as jurisdictions develop novel ways to respond to the new international tax framework.
What are the resource challenges for tax and finance teams?
As outlined above, GloBE can impact organisations in differing ways. The most affected groups will face large additional tax charges. This will particularly be the case where groups generate profits in jurisdictions where they benefit from preferential tax regimes. In the most extreme cases where no taxes are currently paid in a jurisdiction, groups could find they lose 15% of their profits to tax.
Even where additional taxes are unlikely to be substantial, the amount of global attention given to GloBE will place the C-suite under pressure to understand its potential impact on the organisation and on its competitors. In short, the role of tax and finance departments will come into focus for senior stakeholders and there will be a need to demonstrate capability.
As the pressure ratchets up on tax and finance departments, so does the complexity of GloBE. QDMTTs will effectively transform what was previously a head office project requiring compliance with effectively one set of rules into a global project requiring compliance with multiple sets of rules, each of which with nuanced differences. This complexity will mandate the involvement of local teams and advisers, making the project a larger endeavour.
Each organisation will have different capabilities and some will be better placed to cope with GloBE than others. However, there are several common themes across organisations.
Tax and finance teams have consistently been asked to do more with less, with the majority of organisations running a relatively lean operating model. Many organisations have turned away from tax technical and advisory skills, in favour of pursuing reporting efficiencies, often through the use of technology. As a result, fewer people within organisations are comfortable working through the details of several hundred pages of complex tax law and even fewer can condense that knowledge into easily communicable messages.
Some tax and finance roles have also been made more junior, with less experienced staff in leadership roles, which may lead to challenges in securing sufficient internal and external resources to run the size of project that may be required for GloBE. In summary, many teams suffer skill, capability or resource gaps that will make it challenging for them to adequately respond to the challenges ahead.
Addressing gaps will not be easy and in many cases will require some form of additional resources, whether in the form of new hires, internal transfers or external consultants.
In order to secure additional resources, tax directors may have to step outside their comfort zone and make the case that GloBE should be considered a top organisational priority. This will bring additional attention and pressure to tax departments.
However, hopefully this will mean more recognition is given to the successful deployment of resources, rather than to an unexpected surprise when a higher than expected top-up tax demand arrives or when a compliance process goes wrong, and open up new opportunities for the tax and finance functions to engage.