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Pillar Two ordering

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It’s not exactly straightforward, it is?

This is my summary of the ordering of the Pillar Two (and related) rules:

  1. Subject to tax rule (STTR) on certain payments to a constituent entity (CE), calculated ignoring Pillar Two top-up taxes (TUT) paid by the CE. These rules are yet to be released by the OECD and so their scope is uncertain (management fees? capital gains?).
  2. Anti-hybrid and similar rules in respect of payments made to a CE. These will possibly not take into account any TUT paid by the CE or in respect of its income (but should they?). This will impact the payor’s covered taxes.
  3. Qualified domestic minimum top-up tax (QDMTT) for the jurisdiction with STTRs included in the covered taxes where the payee is in the jurisdiction. It is important that the local QDMTT is allowed to be more restrictive and go beyond the OECD requirements, in which case the local QDMTT may result in a higher TUT than under the OECD QDMTT.
  4. Controlled foreign company (CFC) rules by the CE’s owner (direct or indirect). Would the CFC rules as currently drafted take into account QDMTT paid for the CE’s jurisdiction (possibly paid by another CE)? It will depend on a number of factors.
  5. The income inclusion rule (IIR) for the group. The IIR calculation should take into account STTRs and QDMTTs, but it will be based on the rules of the jurisdiction applying IIR.
  6. The undertaxed payments rule (UTPR) for the group taking into account everything above. Hopefully, separate UTPR computations would not be required for groups that pay IIR.

The OECD will then review all QDMTTs, IIRs and UTPRs to make sure they are in line with the standards, i.e. ‘qualified’. While we know that a non-qualified tax should be ignored, nobody really knows yet what the practical implications are of a tax being non-qualified, especially over a number of years where tax liabilities have already been paid.

An MNC group will file returns for each STTR (unless incorporated into existing withholding tax returns), QDMTT for each QDMTT jurisdiction, IIR for the group that may need to include QDMTTs recalculated to the OECD standard, and possibly UTPR in each UTPR jurisdiction. Each of these returns may be based on slightly different numbers, and the OECD is working on how to align these and how to deal with controversy, and it will, at some stage, publish relevant guidance.

Wouldn’t it be easier if the rules simply required MNC groups to file a single IIR return to the OECD and pay a single self-assessed tax amount for the entire group to the OECD? The OECD would then crunch the numbers, and allocate the rest to the relevant jurisdictions under the STTR/QDMTT/IIR/UTPR waterfall? I am sure audits and enforcement framework could be worked out within the Inclusive Framework.  

Tom Toryanik, EY (commenting here in a personal capacity)

Issue: 1623
Categories: In brief
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