Building on its work on BEPS 2.0 - focuses on addressing the tax challenges of digitalization of the economy, the OECD/G20 Inclusive Framework released Pillar Two (Global Minimum Tax) Model Rules.
To summarize, one aspect of BEPS 2.0 is the introduction of a global minimum tax (15%) for multinational enterprises (MNEs) with annual revenue of Euro 750 million or more.
BEPS 2.0 – Pillar Two requires MNEs to pay a minimum tax of 15% considering the financials of the Company prepared as per recognized accounting standards. The main components of tax calculation are the Calculation of Profits and the Effective tax rate of each jurisdiction.
The Model Rules on Global Minimum Tax states the scope and mechanics for the GloBE rules (the two interlocking domestic rules) – Income Inclusion Rule (IIR) and Under tax payment Rule (UTPR)) and contains 10 chapters as listed under:
We discuss herewith the key provisions of scope and charging provisions (broad operative rules) of the Pillar Two of BEPS 2.0:
Taxpayers in the scope of the rules are required to calculate their Effective Tax Rate(‘ETR’) for each jurisdiction where they operate and pay top-up tax for the difference between their ETR per jurisdiction and Global Minimum rate i.e., 15%.
This computation is a central element of the GloBE rules and plays an important role in the ETR calculation.
The computation of the GloBE Income or Loss starts with net income or loss as per consolidated financial statements of the UPE before any consolidation adjustments eliminate intra-group transactions. Then, adjustments are required for, net tax expense, Dividends, Equity Gains or Losses, Gains or Losses on revaluation and disposition of assets, prior period errors, etc.
It is imperative that the transactions between Entities located in different jurisdictions are at the Arm’s-Length Principle and the same transaction amount needs to be recorded in the respective entity’s accounts.
Chapter 3 provide international shipping and ancillary activities. This chapter specifically provides that certain income from international shipping and ancillary activities shall be excluded from GloBE Income or Loss.
Taxes attributable to the GloBE income or loss of each Entity. This is the second component of the ETR calculation. The definition of covered taxes applies solely for the purposes of the GloBE rules. It also provides specific rules for the allocation of taxes among the entities and mechanisms to address temporary differences.
the sum of the Adjusted Covered Taxes of each Entity located in the jurisdiction
the Net GloBE Income of the jurisdiction for the Fiscal Year
Post calculation of ETR for each jurisdiction, the jurisdiction which has ETR below 15% is identified as Low-Tax Jurisdiction, and jurisdictional Top-Up Tax Percentage is computed.
The resulting Top-up Tax of each Low Tax Entity is then charged to a Parent Entity or to Entities located in a UTPR Jurisdiction.
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