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 issued by 136 members of the Inclusive Framework on 8 October 2021.
In December 2021 the OECD published Model Rules for Pillar 2 of this plan and the EU Commission published its draft directive on the same topic. This page provides information on Pillar 1 and Pillar 2 and will be updated when further information is available.
OECD Agreed Components of Pillar 1
Pillar 1 seeks to reallocate some taxing rights over in scope multinational enterprises (MNEs) from their home jurisdiction to the markets where they have business activities and earn profits, even if they do not have a physical presence there.
In-scope companies are the MNEs with global turnover above 20 billion euros and profitability above 10% (i.e. profit before tax/revenue) calculated using an averaging mechanism with the potential for the turnover threshold to be reduced to 10 billion euros after 7 years. Extractives and Regulated Financial Services are excluded from Pillar 1.
OECD Agreed Components of Pillar 2
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
- 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 rules will apply to MNEs that meet the 750 million euros threshold as determined under BEPS Action 13 (country by country reporting). The minimum tax rate used for purposes of the IIR and UTPR will be 15%. The GloBE rules do not require jurisdictions to change their corporate income tax rates, they instead provide for a common approach if jurisdiction chooses to adopt this top-up tax system.
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. The Isle of Man does not currently have any relevant treaties with Inclusive Framework members that are developing countries.
OECD Inclusive Framework Implementation Plan
A new Multilateral Convention (MLC) and an Explanatory Statement is to be concluded by the Inclusive Framework by early 2022 so that it can be opened for signature by jurisdictions by mid-2022 with the objective of enabling it to enter into force and effect in 2023, once a critical mass of jurisdictions have ratified it.
The Inclusive Framework will also be developing model rules for domestic legislation and commentary required to implement Pillar 1 by early 2022.
Model rules for domestic legislation required to implement Pillar 2 GloBE rules have been developed by the Inclusive Framework and were published on 20 December 2021. These Pillar 2 GloBE Model rules, as well as overview of the rules, FAQs and fact sheets on the application of the rules, can be found on the OECD BEPS website. A commentary to the Pillar 2 GloBE Model rules is also being developed by the Inclusive framework and is expected to be published early in 2022.
An implementation framework covering agreed administrative procedures will be developed to facilitate the implementation of the GloBE rules. The OECD intends holding a public consultation event on the implementation framework in February 2022.
A model treaty provision to give effect to the Pillar 2 STTR and a multilateral instrument (MLI), which will facilitate the implementation of the STTR into bilateral treaties, will be developed by the early part of 2022. The OECD intends holding a public consultation event on the STTR in March 2022.
EU Commission Draft Directive (Pillar 2)
The draft Directive only seeks to implement the Pillar 2 GloBE Model rules not the Pillar 2 STTR. The draft Directive reflects the OECD agreement, with some necessary adjustments, to guarantee conformity with EU law. The main adjustments to the draft Directive are:
- it applies also to large-scale domestic groups i.e. those groups that have their ultimate parent entity in an EU member state, meet the 750 million euros threshold but are not multi-national enterprises
- it utilises an option in the Pillar 2 GloBE Model rules to extend the IIR to constituent entities resident in the EU member state of the parent entity as well as those resident in other jurisdictions and
- it provides that EU member states can opt to apply the top up tax domestically to constituent entities located in its territory (i.e. those parented elsewhere)
EU member states will need to unanimously agree the draft Directive in Council. The EU Commission has stated that it is working to reach agreement during the French presidency so that the globally agreed deadline of 2023 for the entry into force of the rules can be met.