Navigating BEPS Pillar 2 Reforms: are MNEs' prepared?

Pillar 1 mainly focuses on the re-allocation of profits to market jurisdictions, Pillar 2 is designed to ensure that large MNEs pay a minimum 15% of tax on their income arising in every jurisdiction where they operate. 

In brief

• OECD's BEPS 2.0 Pillar 2 project has progressed well, with OECD offering comprehensive guidance on various aspects of pillar 2 to be incorporated into domestic legislation of countries within agreed timelines.
• Due to a clear political will, numerous countries have either started implementing pillar 2 or have expressed their intent for the near future.
• With the Global Minimum Tax now a reality, multinational enterprises (MNEs) must evaluate the impact and be well-prepared to adapt.

Journey so far

The Organisation for Economic Co-operation and Development (‘OECD’)/G20 Inclusive Framework (‘IF’) on Base Erosion and Profit Shifting (‘BEPS’) had agreed a two-pillar solution in October 2021. This initiative aimed to address tax challenges brought about by the digitalization of the economy and has made significant progress so far. While Pillar 1 mainly focuses on the re-allocation of profits to market jurisdictions, Pillar 2 is designed to ensure that large MNEs pay a minimum 15% of tax on their income arising in every jurisdiction where they operate. 

Since such agreement, OECD till date has released a series of agreed documents including Model Global Anti-Base Erosion (‘GloBE’) Rules, Commentary to the Model GloBE Rules, guidance on GloBE Safe Harbours, two sets of Administrative Guidance, a standardized GloBE Information Return (‘GIR’), etc. These documents serve as templates for jurisdictions to incorporate pillar 2 into their domestic laws for its coordinated implementation within the agreed timeframe.

Another core element of the Pillar 2 is Subject to Tax Rule (‘STTR’) which is a treaty-based rule that gives taxing right to source countries (which are considered as developing countries) on certain payments to connected parties if such stream of income is subject to tax rates below 9% in the payee’s jurisdiction of residence. A document released in July 2023, contains the model treaty provision to be applied to such defined payments. It has been agreed that a multilateral instrument to facilitate implementation of STTR will be open for signature from 2 October 2023¹.  

It is very evident from the outcome statement, delivered in July 2023, that there is a political will of the IF members to implement the Two pillar approach. However, the stringent timelines may pose a challenge for its smooth implementation. A chart depicting progress made till date and way forward is provided below:

How are countries embracing Pillar 2:

The global minimum tax is already a reality where several jurisdictions have either issued final/ draft legislations or have set clear intentions of enacting such measures. Talking about key jurisdictions, all European Union (‘EU’) members have accepted to implement pillar 2 measures. Basis the EU directives, countries like Germany and Netherlands have already issued draft regulations. United Kingdom in July 2023 has enacted the legislation to bring in effect Qualified Domestic Minimum Top-Up Tax (‘QDMTT’) and Income Inclusion Rule (‘IIR’) for fiscal years starting on or after 31 December 2023 and Undertaxed Payments Rule (‘UTPR’) from 31 December 2024. For India headquartered MNE Groups having parent entities in EU or United Kingdom, the relevant fiscal year from which GloBE rules would become applicable would be from 1 April 2024. Moving towards East, Japan, South Korea have already enacted legislation wherein both these countries would be implementing IIR beginning 2024. Now, drawing our attention to some of the common holding jurisdictions, Mauritius has introduced QDMTT, however, its expected date of implementation is yet unclear. Singapore and Hong Kong in its budget had announced its plan to implement GloBE (IIR and UTPR) and Domestic Top-up Tax effective for fiscal years starting on or after 1 January 2025.² Besides these, numerous other IF members have expressed their intention to adopt the GloBE Rules through official channels. Yet, noticeably absent among them are United States (‘US’) and China. However, it is critical to note that the GloBE rules are not considered as minimum standard, however their implementation would happen under a ‘common approach’. A ‘common approach’ means a jurisdiction must follow Model Rules if implemented, however, if not implemented, it has to accept the implementation by others in a coordinated and consistent manner.