OECD's Global Anti-Base Erosion Model Rules (Pillar Two)

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The international tax landscape is undergoing a transformative shift with the OECD’s introduction of the Global Anti-Base Erosion (GloBE) Model Rules under Pillar Two. These rules, which propose a global minimum effective tax rate of 15%, are designed to address base erosion and profit shifting (BEPS) practices by multinational enterprises (MNEs). 

Understanding Pillar Two and Its Objectives

The GloBE Model Rules are a part of the OECD’s Two-Pillar Solution aimed at addressing the tax challenges arising from digitalization and globalization. While Pillar One focuses on reallocating taxing rights to market jurisdictions, Pillar Two introduces a framework to ensure MNEs are taxed at a minimum level regardless of their location.

The Pillar Two mechanism, inter alia, intends to prevent harmful tax competition among jurisdictions by offering ultra-low corporate tax rates, to curb profit shifting by restricting the MNEs’ ability to exploit low-tax jurisdictions, and to promote fair taxation among all jurisdictions, particularly developing countries. 

Key Components of the GloBE Rules

The GloBE Model Rules include several essential components aimed at ensuring effective implementation:

1. Exclusions and Thresholds: The GloBE Rules include specific carve-outs to balance compliance with practicality. For instance, the framework exempts small-scale MNEs with annual revenues below €750 million. Further, taxpayers with no overseas exposure, government organization and NGOs are excluded from its purview. 
   
   
2. Income Inclusion Rule (IIR): This rule requires the parent entity of an MNE to calculate the effective tax rate in each jurisdiction where it operates. If the rate falls below the global minimum of 15%, the parent company must pay a top-up tax to bring the effective rate up to the threshold. 
   
   
3. Undertaxed Payments Rule (UTPR): Designed as a backstop to the IIR, the UTPR applies when low-taxed profits are not adequately taxed under the IIR. It enables other jurisdictions to apply additional taxes by denying deductions or implementing equivalent adjustments. The UTPR ensures that untaxed profits do not escape the global tax net.
   
   
4. Subject to Tax Rule (STTR): Targeted primarily at source jurisdictions in developing countries, the STTR allows them to levy a withholding tax on specific cross-border payments, such as royalties and interest, that are subject to very low rates in the recipient jurisdiction. STTR is based on the tax treaties and allows jurisdictions to raise the tax rate to 9% by implementing the multilateral instrument (MLI) or by way of bilateral treaty negotiations. 
   
   
5. Effective Tax Rate (ETR): This involves calculating the effective tax rate in a jurisdiction by considering covered taxes and profits. If the ETR is below the global minimum tax rate of 15%, the entity may be subject to top-up taxes or QMDTT. 
   
   
6. Qualified Minimum Domestic Top-Up Tax (QMDTT):  It allows jurisdictions to retain taxing rights by imposing a domestic minimum tax on in-scope MNEs operating within their borders. It involves an amendment to the domestic tax legislations to incorporate QMDTT.  
   
   
7. Simplified Compliance Mechanisms: Recognizing the complexity of global tax systems, the OECD has introduced measures to ease compliance for businesses. These include safe harbor provisions, which exempt certain low-risk entities from detailed calculations, and streamlined reporting frameworks to reduce the administrative burden.

Conclusion

The above discussion provides a general understanding of the different terms used under Pillar Two rules. More clarity will emerge when the GCC countries issue regulations to amend the domestic tax legislations. 

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