BEPS Pillar 2: Ensuring a Minimum Taxation Standard in a Digitalized Global Economy

As the digital economy continues to thrive, the need for an equitable and sustainable international tax system has become increasingly evident. The Base Erosion and Profit Shifting (BEPS) project, initiated by the Organization for Economic Co-operation and Development (OECD), has addressed these challenges through the implementation of two pillars solution. ‘Pillar One’ focuses on profit relocation to market jurisdictions, while ‘Pillar Two’ Global Anti-Base Erosion (GloBE) rules introduce a global minimum tax of 15% that would apply to a multinational enterprise (MNE) group with consolidated financial statement revenue in excess of EUR750 million. Over the time, the OECD has released model GloBE Rules, commentary, guidance on GloBE safe harbours, administrative guidance and standardised GloBE information return.

Under the GloBE rules, an MNE group would be required to determine an effective tax rate (ETR) for all entities located in a jurisdiction. When the entities’ jurisdictional ETR is less than 15%, a top-up tax generally will be due to bring the jurisdictional effective tax rate to 15%. Where ETR is lower than the minimum tax rate of 15%, MNE would be liable to pay top-up taxes under Income Inclusion Rule (IIR) or Undertaxed Payments Rule (UTPR) mechanism. Top-up tax is calculated as difference between agreed minimum tax rate and ETR in each jurisdiction. The other vital component of the Pillar Two is Subject to Tax Rule (‘STTR’) which is a treaty-based rule granting source countries the right to tax certain cross-border payments if the recipient’s jurisdiction imposes a rate below 9%.

The 18th G20 Summit convened under India’s Presidency for the first time, with the underlying theme of ‘Vasudhaiva Kutumbakam’, has accomplished the major breakthrough on 9.9.2023, with the adoption of the G20 New Delhi Leaders’ Declaration. In it also, the G20 leaders have agreed for the swift implementation of the Two-Pillar international tax package.

Numerous jurisdictions have made significant progress in implementing the GloBE Rules, either through enacting final or draft legislation, or by expressing their clear intentions to do so. The implementation of the global minimum tax is well underway, with approximately 50 jurisdictions taking measures to incorporate it into their tax systems. According to estimates, by 2025, nearly 90% of global multinational enterprises (MNEs) generating revenues above EUR 750 million will be required to adhere to a minimum effective tax rate of 15% in all the jurisdictions where they operate.

Having said this, the implementation of the Pillar Two Model Rules will have a significant impact on organizations worldwide. In no time, the corporate groups have to gear up to assess the implications of global minimum taxation and keep the preparedness and readiness due to the extensive data requirements as well as the complex rules for determining the ETR. Reviewing and simplifying entity structure in the context of these emerging tax reforms is need of the hour, such that, corporate structures are aligned vis a vis Pillar Two world. Needless to mention, it is crucial for the multinational corporates to understand the implications and take proactive steps to ensure compliance and minimize tax risk.

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