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. This page provides information on Pillar 1 and Pillar 2 and will be updated when further information is available.
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.
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.
Inclusive Framework Implementation Plan
Pillar 1
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.
Pillar 2
Model rules for domestic legislation required to implement Pillar 2 GloBE rules will be developed by the Inclusive Framework by the end of November 2021.
An implementation framework covering agreed administrative procedures will be developed to facilitate the implementation of the GloBE rules by the end of 2022 at the latest.
A model treaty provision to give effect to the Pillar 2 STTR and commentary will also be developed by the end of November 2021. A multilateral instrument (MLI) will be developed by mid-2022 to facilitate the implementation of the STTR into bilateral treaties.
