Pillar 1 and Pillar 2
On 1 July 2021, 130 members of the Inclusive Framework issued a Statement establishing a new framework for international tax reform in the form of a high level, two pillar plan. A new two-pillar solution to reform international taxation rules was subsequently issued by 136 members of the Inclusive Framework on 8 October 2021.
Keeping updated
This page provides information on Pillar 1 and Pillar 2 and will be updated when further information is available.
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Pillar 1
Pillar 1 aims to ensure a fairer distribution of taxing rights among countries with respect to the largest and most profitable multinational enterprises (MNEs). It will reallocate taxing rights over a portion of the residual profits of MNEs (Amount A) to the market countries and jurisdictions where they have business activities, regardless of whether they have a physical presence there. Specifically, MNEs with global revenues above 20 billion euros and profitability above 10% will be covered by the new rules, with 25% of profit above the 10% threshold being reallocated to market jurisdictions using a new formulaic approach.
Pillar 1 also seeks to introduce a simplified and streamlined application of the arm’s length principle to some in-country baseline marketing and distribution activities (Amount B).
A new Multilateral Convention (MLC) to implement Pillar 1 Amount A has been negotiated. It is not yet clear when this will come into force.
Pillar 2: Overview
Pillar 2 consists of:
- two interlocking domestic rules (together the Global Anti-Base Erosion Rules (GloBE) rules):
- (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a constituent entity and
- (ii) an Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR and
- (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a constituent entity and
- a treaty-based rule (the Subject to Tax Rule (STTR)) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate.
The GloBE Model rules aim to ensure minimum effective taxation (at a 15% rate) of MNEs on a jurisdictional basis and will apply to MNEs that meet a 750 million euros annual revenue threshold test. The GloBE rules do not require jurisdictions to change their corporate income tax rates, they instead provide for a common approach if a jurisdiction chooses to adopt this top-up tax system.
The GloBE rules also allow a jurisdiction to implement a Qualified Domestic Minimum Top-up Tax (QDMTT). A QDMTT is a minimum tax that is included in the domestic laws of a jurisdiction and, effectively increases the domestic tax liability of an MNE group’s profits in a jurisdiction up to the 15% rate (and thus avoids the application of the IIR and UTPR by other jurisdictions in respect of such profits).
Under the STTR members of the Inclusive Framework that apply nominal corporate income tax rates below the STTR minimum rate of 9% to interest, royalties and a defined set of other payments would implement the STTR into their bilateral treaties with Inclusive Framework members that are developing countries when requested to do so.
Pillar 2: Implementation
GloBE Model rules
In December 2021, the OECD published the Pillar 2 GloBE Model rules. A commentary to the Pillar 2 GloBE Model rules was published in March 2022 and further documents, including agreed administrative guidance, FAQs and fact sheets have subsequently been published and can be found on the OECD BEPS website.
On 20 May 2024 the Island issued a News Release confirming that it intends to implement a Qualified Domestic Minimum Top-up Tax (QDMTT) from 1 January 2025. This top-up tax, which will be a new tax separate from existing Isle of Man income tax, will first apply to accounting periods commencing on or after 1 January 2025 and will be designed such that it should be granted Qualifying status by the OECD’s Inclusive Framework as a QDMTT. The News Release also stated that a final decision on whether the Island will implement an Income Inclusion Rule will be taken later in the year.
It is expected that the necessary legislation to implement the Island’s Pillar 2 response will be brought forward to Tynwald in Autumn 2024.
Subject to Tax Rule
A multilateral instrument to give effect to the Pillar 2 STTR has been developed, which will facilitate the implementation of the STTR into bilateral treaties. In addition, jurisdictions are free to renegotiate existing tax treaties on a bilateral basis to give effect to the STTR. The Island does not at this time have any tax treaties that are relevant for the purposes of the STTR.
