The OECD has published detailed model rules for pillar two, providing governments with a template to implement the two pillar agreement to address the tax challenges of the digitalised global economy, as agreed in October 2021.
define the MNEs within the scope of the minimum tax;
set out a mechanism for calculating an MNE’s effective tax rate on a jurisdictional basis, and for determining the amount of top-up tax payable under the rules; and
impose the top-up tax on a member of the MNE group in accordance with an agreed rule order.
The pillar two model rules also address the treatment of acquisitions and disposals of group members and include specific rules to deal with particular holding structures and tax neutrality regimes. The rules also cover administrative aspects, including information filing requirements, and provide for transitional rules for MNEs that become subject to the global minimum tax.
An explanatory commentary is expected later this month in January, and a more detailed implementation framework is expected in the middle of 2022 at the earliest. The stated aim is for pillar two to be brought into law in 2022, to be effective in 2023, with the undertaxed payments rule to come into effect in 2024.
Tim Sarson, head of tax policy at KPMG UK, said: ‘The publication of model rules for the 15% global minimum corporate tax puts paid to any rumours of its derailment. Some had theorised that President Biden’s domestic tax agenda getting delayed had put the OECD’s plans at risk. But this new documentation suggests that international political consensus and confidence in the reforms remains strong.
‘The move is a significant step towards realisation for the pillar two changes but businesses will be rightly concerned about the amount of detail they are still waiting for. With little over a year to go until enforcement, and a full implementation framework not due until next year, question marks linger over the administrative burden of compliance.’
‘The OECD did include one early stocking filler from the UK Treasury’s perspective – as requested, it looks as though tax per the accounts, not cash tax, will be used as the starting point for calculating if a business is required to pay top-up tax under the rules. This should simplify compliance for most firms,’ Sarson added. ‘However, the revenue threshold of €750m is a steep cliff edge and means businesses just below the cut-off need to start thinking about compliance now before their growth might tip them over.’
In related news, the European Commission has since proposed a new directive to support the global minimum 15% effective tax rate, for large groups operating in the EU. The directive will set out how the principles will be applied in practice in the EU, with a common set of rules to ensure the effective minimum rate is ‘properly and consistently applied across the EU’. As the Commission’s Q&A document explains: ‘the proposal sets out how the effective tax rate will be calculated per jurisdiction, and includes clear, legally binding rules that will ensure large groups in the EU pay a 15% minimum rate for every jurisdiction in which they operate’.
Next steps for the directive will require unanimous agreement of member states via the Council, and the European Parliament and European Economic and Social Committee will also be consulted.
The OECD has published detailed model rules for pillar two, providing governments with a template to implement the two pillar agreement to address the tax challenges of the digitalised global economy, as agreed in October 2021.
define the MNEs within the scope of the minimum tax;
set out a mechanism for calculating an MNE’s effective tax rate on a jurisdictional basis, and for determining the amount of top-up tax payable under the rules; and
impose the top-up tax on a member of the MNE group in accordance with an agreed rule order.
The pillar two model rules also address the treatment of acquisitions and disposals of group members and include specific rules to deal with particular holding structures and tax neutrality regimes. The rules also cover administrative aspects, including information filing requirements, and provide for transitional rules for MNEs that become subject to the global minimum tax.
An explanatory commentary is expected later this month in January, and a more detailed implementation framework is expected in the middle of 2022 at the earliest. The stated aim is for pillar two to be brought into law in 2022, to be effective in 2023, with the undertaxed payments rule to come into effect in 2024.
Tim Sarson, head of tax policy at KPMG UK, said: ‘The publication of model rules for the 15% global minimum corporate tax puts paid to any rumours of its derailment. Some had theorised that President Biden’s domestic tax agenda getting delayed had put the OECD’s plans at risk. But this new documentation suggests that international political consensus and confidence in the reforms remains strong.
‘The move is a significant step towards realisation for the pillar two changes but businesses will be rightly concerned about the amount of detail they are still waiting for. With little over a year to go until enforcement, and a full implementation framework not due until next year, question marks linger over the administrative burden of compliance.’
‘The OECD did include one early stocking filler from the UK Treasury’s perspective – as requested, it looks as though tax per the accounts, not cash tax, will be used as the starting point for calculating if a business is required to pay top-up tax under the rules. This should simplify compliance for most firms,’ Sarson added. ‘However, the revenue threshold of €750m is a steep cliff edge and means businesses just below the cut-off need to start thinking about compliance now before their growth might tip them over.’
In related news, the European Commission has since proposed a new directive to support the global minimum 15% effective tax rate, for large groups operating in the EU. The directive will set out how the principles will be applied in practice in the EU, with a common set of rules to ensure the effective minimum rate is ‘properly and consistently applied across the EU’. As the Commission’s Q&A document explains: ‘the proposal sets out how the effective tax rate will be calculated per jurisdiction, and includes clear, legally binding rules that will ensure large groups in the EU pay a 15% minimum rate for every jurisdiction in which they operate’.
Next steps for the directive will require unanimous agreement of member states via the Council, and the European Parliament and European Economic and Social Committee will also be consulted.
