Pillar-Two Model Rules for the Domestic Implementation

Pillar- Two model rules for the

Domestic implementation of the global minimum tax released by the OECD 

Pillar-Two Model Rules for the Domestic Implementation

Pillar-Two Model Rules for the Domestic Implementation of the Global Minimum Tax Released by the OECD

On 20 December 2021, the OECD released a set of rules that is aimed at assisting in a global reform of the international tax system. The Pillar-Two model rules will provide governments with a template for the implementation of the Two-Pillar solution, which is designed to oppose the tax challenges arising from digitalisation and globalisation of the economy. The Two-Pillar solution was formally agreed in October 2021 by 137 countries and jurisdictions under the OECD/G20 Inclusive Framework on BEPS.

The Pillar-Two model rules clarify the mechanism for the Global Anti-Base Erosion (Globe) rules under Pillar Two, which will introduce a global minimum corporate tax rate set at 15%. The minimum tax will apply to MNEs with a revenue above EUR 750 million and is estimated to generate around USD 150 billion in annual additional global tax revenues.

Moreover, the Globe rules will also include a so-called “top-up tax” that will be applied to profits in any jurisdiction whenever the effective tax rate is below the minimum 15% rate. This will, in the OECD’s view, foster a coordinated system of taxation which will force large MNE groups to pay a minimum level of tax on income arising in each of the jurisdictions in which they operate.

As part of an effort to assist countries in the implementation of the Globe rules into their domestic legislation in 2022, the Pillar-Two model rules:

  • 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.

Soon after the release of the Pillar-Two rules by the OECD, on 22 December 2021, the European Commission issued a proposal for a Council Directive concerning a global minimum level of taxation for multinational groups (“Council Directive”). The Council Directive follows closely the OECD’s Two-Pillar rules and sets out how the principles relating to the 15% effective tax rate will be applied within the EU. Special attention is paid to the principles regulating the calculation of the tax rate, particularly with reference to the so-called “top-up tax”. Such a tax is applied irrespectively of whether the subsidiary is located in a country that has signed up to the international OECD/G20 agreement or not, and is composed of an “Income Inclusion Rule” and a backstop rule named “Undertaxed Payment Rule”.

As of May 2018, the UAE has been an official member of OECD BEPS project. As such, following the 8 October 2021 statement, the UAE agreed to implement the OECD’s Two-Pillar approach to reform its International Tax framework and to implement a minimum Corporate Tax rate of 15% starting 2023. The implementation of a Global Minimum Tax at 15% will without question heavily impact the UAE, effectively neutralizing the tax benefits of the UAE as a country. Moreover, relevant MNEs should evaluate the potential impact of the global minimum tax on intra-group transactions and contracts, as well as the possible additional costs to their business.

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Alessandro Valente
Alessandro Valente
Director - International Tax Service & Transfer Pricing