Navigating national developments and differences in a global framework: Implementation of the OECD’s Pillar II rules across jurisdictions

Mirna Vlahovic
Güray Ilman

The Pillar II initiative of the Organization for Economic Cooperation and Development (“OECD”), a key component of its Base Erosion and Profit Shifting (“BEPS”) 2.0 project, has brought significant changes to the global direct tax landscape. The initiative aims to prevent tax base erosion and profit shifting by ensuring that large multinational enterprises (“MNE”) pay a minimum effective tax rate (“ETR”) of 15% in each jurisdiction they operate in. It does so by introducing Global Anti-Base Erosion Model Rules (“GloBE”).

It should be noted, however, that, although the OECD member states and members of the OECD Inclusive Framework might have participated in the development of GloBE Rules,¹ they are not obliged by OECD as a multinational organization to adopt them into their legislation, since OECD has no such authority. Nevertheless, if the members of the Inclusive Framework decide to implement global minimum tax in their respective legislations, they have committed to follow the common approach defined in the GloBE Rules. Hence, it is clear that, by establishing the global minimum tax rate of 15% and defining a common approach in minimum corporate taxation, Pillar II represents a step further in the global harmonization of direct taxes.

An even more advanced approach to harmonization of direct taxes is present in the European Union (“EU”). Namely, while the OECD cannot force its member states to implement the GloBE Rules into their national legislations, by mirroring the GloBE Rules into the EU Directive 2022/2523 (“Pillar II Directive”), which is binding for EU Member States, the European Union has ensured that the global minimum corporate tax of 15% is implemented across the EU, with the exception of a few smaller EU Member States which are entitled to delay the implementation.² It should also be noted that, while the OECD GloBE rules are restricted to groups with foreign subsidiaries and/or branches (“MNE”) which exceed the consolidated revenue threshold of EUR 750m, Pillar II Directive applies also to large-scale domestic groups, where all group members are present in the same EU Member State.

Additionally, building on the rules from the Pillar II Directive, and aiming for even higher level of harmonization in the field of direct taxation, in 2023 the European Commission has adopted a new proposal for a new legislative framework for corporate taxation in the EU – the so-called BEFIT (Business in Europe: Framework for Taxation). The goal is to simplify tax rules and compliance in the EU, as the constituent entities of the same MNE group would calculate their corporate tax base in accordance with a common set of rules (which are already defined in the Pillar II Directive), regardless of the fact that the constituent entities are tax residents in different jurisdictions (which have their own rules for determining corporate tax base). The tax bases of all members of the group would then be aggregated into one single tax base and, afterwards, each constituent entity would be allocated a percentage of the aggregate MNE group’s tax base, to be adjusted following the national tax rules of the respective EU Member State where the MNE group member is tax resident.

Although in principle the OECD Pillar II Model Rules and the Pillar II Directive should lead to significant harmonization of corporate tax rules, they allow the countries to develop their own approach in certain areas without collision with the common Pillar II approach. Additionally, as countries begin implementing these rules, some of them introduce modifications or new tax-related legislations that suit their different economic situations and tax policies. Finally, some countries decide to take a significantly different approach to prevention of tax base erosion and profit shifting. It is important for both covered MNE and tax advisors dealing with clients in this increasingly intricate international environment to understand these nuances.

To start with the most extreme example – USA – it should be noted that, although the USA have supported the BEPS 2.0 project and been actively engaged in the OECD discussions thereon, they have not yet introduced the GloBE Rules into their legislation. Namely, under the Global Intangible Low-Taxed Income (GILTI) rules introduced by the Tax Cuts and Jobs Act in 2017, the USA have already implemented their own minimum tax regime. However, the differences in comparison with the GloBE Rules are significant. For example, GILTI operates on a worldwide blending basis – allowing US-based MNEs to average their rates across multiple jurisdictions, while Pillar II requires jurisdictional blending of financials of MNE’s constituent entities, which are tax residents in the same jurisdiction. US statutory corporate tax rate, applicable to GILTI as well, is 21%, but companies can benefit from lower rates for several reasons, potentially driving the ETR below 15%, i.e., below the Pillar II threshold. Additionally, although both GILTI and Pillar II have substance-based carve-out (decreasing the income subject to the minimum tax rate) and foreign tax credit rules, there are significant differences. The stated disparities are likely to continue as the USA seek to balance international cooperation with the competitiveness of its MNE. To bring the USA closer to implementation of GloBE Rules, the OECD has even introduced a special ‘Transitional UTPR’ safe harbour, which delays the application of UTPR to 2026 in case of an ultimate parent entity (‘UPE’) which is tax residents in a jurisdiction with statutory corporate tax rate above 20%, where the IIR mechanism has not been implemented (obviously covering the US UPEs).

Even among the EU member states there are differences in implementation, by which the countries try to adjust the minimum tax rules to their different tax systems and economic frameworks. For example, Belgium has introduced the obligation of groups in scope of minimum tax rules to register with the federal public finance authority and obtain their Pillar II identification number, which shall allow the taxpayers to make Belgian prepayments for the purposes of Belgium QDMTT or IIR. It should be noted that the top-up tax prepayments are not required based on the GloBE Rules and the Pillar II Directive. However, upon implementation of the minimum tax rules, Belgium included Pillar II into its existing tax prepayment schedule, which is non-mandatory, but if the company does not timely settle the obligation in prepayments, a non-deductible surcharge of 9% will be due on the amount of Belgian top-up tax, charged via QDMTT or IIR, which is a very adverse implication.

Some other EU Member States, such as Hungary and Ireland, for example, which have the lowest statutory corporate tax rates in the EU (9% and 12,5% respectively) but were obliged by the EU to implement the Pillar II Directive, have put in place certain measures aimed at continuing to attract foreign investors while complying with OECD standards. Hungary has done so by achieving that as many domestic taxes as possible are included in the definition of covered taxes for the purpose of calculation of Pillar II ETR. In addition to corporate tax, local business tax (typically levied at 2%) was included, although it is levied based on turnover and not profits. Also, with the same goal of maintaining its attractiveness, Hungary has introduced new tax incentives which will be treated as qualifying refundable tax credits, while Ireland has amended its existing tax credits to achieve that they are treated as refundable tax credits, meaning that they do not reduce the ETR for the purpose of top-up tax calculation.

Similar actions have been observed in other countries as well. Namely, if not properly designed (i.e., if characterized as non-refundable tax credits), tax incentives granted to entities in scope of Pillar II can lose their purpose after the implementation of Pillar II rules. Hence, they are an important topic in many countries around the world and it can be expected that many countries will amend their tax incentive systems or introduce new ones.

Further differences in implementation of minimum tax can be observed in national QDMTT rules.³ Namely, the GloBE Rules give the countries the freedom to decide whether they want to introduce QDMTT, but prescribe that, in order to reduce the total top-up tax amount due by the MNE group, QDMTT must be implemented and administered in a way that is consistent with the outcomes provided for under the GloBE Rules and their Commentary. In order to assess whether a domestic minimum tax can be considered as QDMTT, a peer review process is developed. The differences in implementation, relate to, for example, timing (most countries will apply it from 2024, some from 2025), accounting standards applied for the purpose of QDMTT (local accounting standards allowed in some countries, while the others refer to financial accounting standards used for the preparation of the consolidated financial statements), scope (some countries decided to apply it also to MNEs that enjoy relief under the GloBE Rules⁴), substance-based carve-out (countries decide whether it is allowed and to which extent (some countries consider only tangible assets in the calculation⁵) or covered taxes (some countries decided to specifically exclude certain types of taxes from calculation of QDMTT⁶).

Many countries still need to define the details of their QDMTTs via bylaws or legislative amendments. However, for some countries it is already clear that their minimum tax systems do not qualify as QDMTTs. Such is the case with Cyprus, where the minimum tax legislation prescribes ‘push-down’ of certain taxes including CFC taxes (which is not provided for in the GloBE Rules and their Commentary). Due to such deviations, other jurisdictions may not view the Cyprus domestic top-up tax as QDMTT but rather as a covered tax.

Last but not the least, countries implementing minimum tax rules differ in regard to compliance requirements and deadlines. In addition to Belgium, which, as explained above, has added registration and additional compliance requirement, UK and Ireland for example also oblige the MNE groups to register with the tax authority within 6 and 12 months respectively, after the end of the accounting period that makes them subject to the rules. Also, in addition to Global Information Return (“GIR”), introduced by the GloBE Rules, some countries require filing of a tax return, where the deadlines are in some cases shorter than for GIR. Taking into account that GloBE Rules rely on financial statements and country-by-country reporting (“CbCR”) for the purpose of safe harbours, the MNE groups will need to carefully track their compliance calendars and align their Pillar II-related procedures accordingly.

From the above overview it is clear that, while Pillar II represents a step further in the harmonization of corporate taxation across jurisdictions, disparities remain and should be closely monitored. Global minimum tax has arrived (even traditional tax havens such as Channel Islands have implemented it) and taxpayer and tax consultants should adapt their approach to understand and work with the general rules and jurisdictional variations. The growth of multinational companies will be dependent on their ability to navigate the evolving global tax landscape. Tax consultants' expertise will be essential in assisting them in this difficult transition.

 

 

Explanations in this article reflect the writer's personal view on the matter. EY and/or Kuzey YMM ve Bağımsız Denetim A.Ş. disclaim any responsibility in respect of the information and explanations in the article. Please be advised to first receive professional assistance from the related experts before initiating an application regarding a specific matter, since the legislation is changed frequently and is open to different interpretations.

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