PILLAR I

Scope

Multinational enterprises (“MNEs”) meeting the following criteria:

• Global turnover > €20 billion
• Profitability (Profit before tax/revenue) > %10

with the turnover, threshold to be reduced to 10 billion euros, contingent on successful implementation including tax certainty on Amount A, with the relevant review beginning 7 years after the agreement comes into force, and the review being completed in no more than one year. Extractives and Regulated Financial Services are excluded.

Nexus

The new nexus rule will permit the allocation of Amount A to a market jurisdiction in the case the in-scope MNE derives more than €1 million in revenue from that jurisdiction.

The threshold will be €250,000 for the smaller jurisdictions. Smaller jurisdiction refers to the jurisdictions with GDP lower than €40 billion.

The special purpose nexus rule applies solely to determine whether a jurisdiction qualifies for the Amount A allocation.

Compliance costs (incl. tracing small amounts of sales) will be limited to a minimum.

Quantum

20%-30% of the residual profit (in excess of 10% of revenue) of in-scope MNE will be allocated to the market jurisdiction via an allocation key based on revenue.

Revenue Sourcing

The jurisdiction where goods and services are used or consumed will be the point of revenue sourcing. In order to maintain revenue sourcing, detailed source rules will be improved.  For the application of revenue sourcing rules, MNEs are required to use a reliable method based on MNEs specific circumstances.

Tax Base Determination

The measure of profit (or loss) will be determined in line with the financial accounting income (if required, some adjustment can be made) of the MNE. Losses of the MNE will be carried forward.

Segmentation

Segmentation will occur only in exceptional circumstances where, based on the segments disclosed in the financial accounts, a segment meets the scope rules.

Marketing and Distribution Profits Safe Harbour

Where the residual profits of an in-scope MNE are already taxed in a market jurisdiction, a marketing and distribution profits safe harbour will cap the residual profits allocated to the market jurisdiction through Amount A. Further work on the design of the safe harbour will be undertaken, including taking into account the comprehensive scope.

Elimination of Double Taxation

Exemption or credit method will be used with regard to the elimination of double taxation. The entity earning that will bear the tax liability will be drawn from those that gain residual profit.

Tax Certainty

In-scope MNEs will benefit from dispute prevention and resolution mechanisms, which will avoid double taxation for Amount A, including all issues related to Amount A (e.g. transfer pricing and business profits disputes), in a mandatory and binding manner. Disputes on whether issues may relate to Amount A will be solved in a mandatory and binding manner, without delaying the substantive dispute prevention and resolution mechanism.

An elective binding dispute resolution mechanism for issues related to Amount A will be considered for developing economies that are eligible for deferral of their BEPS Action 14 peer review and have no or low levels of MAP disputes.

Amount B

By the end of 2022, a simplified version of the application of the arm’s length principle for domestic marketing and distribution activities will be introduced.

Low-capacity companies will be the main target for the process.

Administration

With the simplification of the tax compliance, MNEs will be able to conduct the process through a single entity.

Unilateral Measures

With this package, the application of new international rules will be effectively coordinated among jurisdictions and all Digital Service Taxes will be removed.

Implementation

The multilateral instrument for the Amount A will be developed and opened for the signature in 2022. The Amount A will be in effect in 2023.

PILLAR II

Overall Design

Pillar Two includes:

• two interlocking domestic rules (together the Global anti-Base Erosion Rules (GloBE) rules: An Income Inclusion Rule (IIR), an Undertaxed Payment Rule (UTPR);
• and a treaty-based rule (the Subject to Tax Rule (STTR))

Rule Status

The GloBE rules will have the status of a common approach.  Meaning that if members:

• are not required to adopt the GloBE rules, but, if they choose to do so, they will implement and administer the rules in a way that is consistent with the outcomes provided for under Pillar Two, including in light of model rules and guidance agreed to by the IF;
• accept the application of the GloBE rules applied by other IF members including agreement as to rule order and the application of any agreed safe harbours.

Scope

The GloBE rules will apply to MNEs that meet the 750 million euros threshold as determined under BEPS Action 13. Countries are free to apply the IIR to MNEs headquartered in their country even if they do not meet the threshold.

The below are not subject to the GloBE rules:

• Government entities,
• international organizations,
• non-profit organizations,
• pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities,
• organizations or funds

Rule Design

The IIR allocates top-up tax based on a top-down approach subject to a split-ownership rule for shareholdings below 80%.

The UTPR allocates top-up tax from low-tax constituent entities including those located in the UPE jurisdiction under a methodology to be agreed.

ETR Calculation

The GloBE rules will operate to impose a top-up tax using an effective tax rate test that is calculated on a jurisdictional basis and that uses a common definition of covered taxes and a tax base determined by reference to financial accounting income (with agreed adjustments consistent with the tax policy objectives of Pillar Two and mechanisms to address timing differences).

In respect of existing distribution tax systems, there will be no top-up tax liability if earnings are distributed within 3 to 4 years and taxed at or above the minimum level.

Minimum Rate

The minimum tax rate will be used for purposes of the IIR and UTPR at least 15%.

Carve-Outs

The GloBE rules will provide for a formulaic substance carve-out that will exclude an amount of income that is at least 5% (in the transition period of 5 years, at least 7.5%) of the carrying value of tangible assets and payroll.

The GloBE rules will also provide for a de minimis exclusion.

Other Exclusions

The GloBE rules also provide for an exclusion for international shipping income using the definition of such income under the OECD Model Tax Convention.

Simplifications

To ensure that the administration of the GloBE rules are as targeted as possible and to avoid compliance and administrative costs that are disproportionate to the policy objectives, the implementation framework will include safe harbours and/or other mechanisms.

GILTI co-existence

It is decided that a minimum rate will be applied on a jurisdictional basis for Pillar 2. In this regard, consideration will be given to the conditions under which the US GILTI regime will co-exist with the GloBE rules, to ensure a level playing field.

Subject to tax rule (STTR)

IF members recognize that the STTR is an integral part of achieving a consensus on Pillar Two for developing countries.1 IF members that apply nominal corporate income tax rates below the STTR minimum rate to interest, royalties, and a defined set of other payments would implement the STTR into their bilateral treaties with developing IF members when requested to do so.

The taxing right will be limited to the difference between the minimum rate and the tax rate on the payment.

The minimum rate for the STTR will be between 7.5% and 9%.

Implementation

IF members release an implementation plan. Pillar Two should be brought into law in 2022, to be effective in 2023.

The implementation plan will contain:

• GloBE Model rules with proper mechanisms to facilitate over time the coordination of the GloBE rules that have been implemented by IF members, including the possible development of a multilateral instrument for that purpose.
• An STTR model provision together with a multilateral instrument to facilitate its adoption.
• Transitional rules, including the possibility of a deferred implementation of the UTPR.