The model rules, released by the Organization for Economic Co-operation and Development (OECD), are part of the second pillar of the proposed two-pillar solution to address the tax challenges of the digital economy, as agreed by 136 countries in October. The second pillar of the OECD plan is the so-called Global Anti-Base Erosion (GloBE) rule, which aims to ensure that large multinational companies pay a minimum level of tax of 15% on income generated in each jurisdiction where they operate.
Countries are not obliged to introduce the second pillar into their own national legislation. However, if they choose to do so, they must implement the rules in accordance with the model rules, to ensure that the second pillar is enforced in a consistent and coordinated way.
Pascal Saint-Amans, Director of the Center for Tax Policy and Administration at the OECD, described the model rules as “an important cornerstone in the development of a two-pillar solution, converting the foundations of a political agreement concluded in October in binding rules”. .
The rules will apply to multinationals whose consolidated turnover is at least 750 million euros in at least two of the last four years. Multinationals whose income exceeds the threshold will have to calculate their effective tax rate for each jurisdiction in which they operate and pay an additional tax on the difference between their effective tax rate by jurisdiction and the minimum rate of 15%. A “de minimis” exclusion applies where there is a relatively small amount of income and earnings in a jurisdiction. Any resulting additional tax is generally charged in the jurisdiction of the ultimate parent company if that jurisdiction has implemented the necessary tax rules. Otherwise, the model rules indicate which group entity pays the additional tax.
The provisions for calculating the effective tax rate take temporary differences into account, largely using the deferred tax accounting method.
The second pillar model rules also address the treatment of acquisitions and disposals of group members and include specific rules to address particular ownership structures and tax neutrality regimes. They also address administrative aspects, including filing requirements, and provide transitional rules for groups that become subject to the global minimum tax.
Countries adopting the GloBE rules are not required to introduce additional domestic taxes on their own resident taxpayers, but may choose to do so. If they do, it will reduce the amount of additional tax that may be due in another jurisdiction, preserving primary taxing rights for the jurisdiction from which the income arises.
Business tax expert Eloise Walker of Pinsent Masons said: ‘In reality you would expect national tax authorities to fall into their desire to raise their effective tax rate to 15%, especially if they can blame it on a “global consensus” engineered by the OECD. If you adopt GloBE anyway, you are not going to cede that extra revenue to another country.
In early 2022, the OECD plans to publish a commentary on the model rules and address the coexistence of the rules with the US Low-Tax Comprehensive Intangible Income (GILTI) rules. President Biden’s administration has proposed changes to the GILTI regime that would better align it with the second pillar, including applying it on a country-by-country basis and ensuring that the effective U.S. statutory rate on foreign-source income is at least minus 15%.
The first pillar of the OECD agreement aims to ensure a perceived fairer distribution of profits and taxing rights between countries compared to the largest multinationals. Multinational companies with a worldwide turnover of more than 20 billion euros will be subject to tax on part of their profits in the countries where they operate. The first pillar is not as advanced as the second pillar, with model rules not expected until early 2022.
“We’ll have to wait and see where the first pillar ends and how it will interact with the second pillar,” Walker said. “It is inevitable that we are in for a period of further disruption as this sea change in international rules unfolds.”