So what’s all this about a 15% global minimum tax rate?

When a global minimum tax was first mooted, it was as a solution to digital economies. International tax legislation had been drafted to take account of the location of people and the acceptance of risk, but the digital age had brought in large flows of value relating to intangibles and there was widespread concern that groups were making large profits in jurisdictions and moving them offshore. Unfortunately, the OECD have developed a couple of massive sledgehammers to crack this peanut.

The OECD have developed a two-pillar approach imaginatively named Doric and Ionic. Nope, they are called the two pillars: Pillar 1 and Pillar 2.

A tax on apples

Pillar 1 seeks to tax very profitable companies (>€20bn global turnover and €2bn of profit) in jurisdictions where they are active by distributing of the excess profits above ten percent turnover between jurisdictions. Unsurprisingly this is called Amount A. Then there is an Amount B which seeks to ensure that a markup on marketing and distribution costs in each jurisdiction is retained. Pillar 1 will be finished with development in 2022.

Regulated financial services and extractive industries are exempt from Pillar 1 although it seems as though one large fiscal authority which headquarters many of the largest Pillar 1 groups is concerned about reinsurance and is looking to have it included in Pillar 1. A political agreement will need to be reached soon.

The 15% global minimum tax

The OECD published its full draft Pillar 2 Model text as an early festive gift on 20 December 2021. 137 countries have signed up to implementing Pillar 2 including many that would have been on tax ‘naughty lists’ a few years ago. It will apply to multi-national groups (“MNEs” where E stands for Enterprises) with consolidated global revenue in their accounts of >€750m.

The firm produced a summary of the Pillar 2 rules with a financial services focus back in January 2021 and for anyone new to Pillar 2 it’s a good place to start reading. It even has some basic examples to help get your head around the concepts.

When is it going to happen?

Timing-wise, the OECD is shooting for implementation into local law in 2022, effective in 2023 and the first return for 31 December years ends by June 2025. The EU has issued a compromise Directive that looks to implement a final Directive in 2022 for transposition into local law by the end of 2023 which technically could still meet the OECD goal. The UK HMT and HMRC consultation close on Monday 4 April at GMT 23.45 and HMRC is officially still aiming for legislation in 2022 effective from 1 April 2023 but is probably nervously watching what others are doing. We expect that most of the responses will comment on timing and be asking for a delay.

OK, my group is in scope, but all my jurisdictions have >20% tax rate, surely it will be a breeze?

Unfortunately, Pillar 2 is horrendously complicated, and if it were to apply as currently drafted, and fiscal authorities are insisting it is already set in stone, it will be a compliance headache for many groups even those who will never pay top-up tax ever.

There are a number of taxing routes but the main two to note are the income inclusion rule (“IIR”) and the Undertaxed payment Rule (“UTPR”) which are due to be implemented first (the UK currently plans from 1 April 2023). Under IIR, good countries, ones that have implemented the rule, pay tax in relation to subsidiary jurisdictions that don’t meet the 15% threshold.

UTPR is scheduled to come in a year later (UK currently plans from 1 April 2024). Good countries, ones that have implemented UTPR, pay tax in relation to other parts of the group that even parts which are not their subsidiaries where those overseas operations do not meet the 15% threshold.

UTPR is switched off for a jurisdiction if a domestic minimum tax (DMT) is brought into that jurisdiction and it meets the 15% test.

Overall, a group will suffer a minimum of 15% tax in each jurisdiction worldwide. And no, having an ETR of 25% in the UK does not help with an ETR of 0% in Bermuda, there is no offset across jurisdictions.

Work assessing how the US GILTI provisions will be amended is ongoing, they are currently not Pillar 2 compliant as they are not jurisdiction by jurisdiction based. Amendments to US tax law are notoriously difficult to legislate.

Sounds pretty gruesome but manageable?

The OECD is consulting on safe harbour provisions which may simplify the rules if certain conditions are met. It is to be hoped the harbours are wide and deep because the adjustments to calculate the ETR under the full model rules are very complex for some businesses. Here are some of the main reasons why:

• The calculations need to be done at an entity level and then aggregated for jurisdictions. For groups with many active entities, the number of calculations of GloBe Income (which is adjusted financial accounting profit per the accounts) and Adjusted Covered Taxes (which are current taxes adjusted partially for deferred tax, uncertain tax positions and other items) will be the main compliance burden and headache.
• There are a number of other complexities that will affect particular industries, especially financial services. Adjustments to income include the removal of dividends in relation to equities held for more than one year, a number which has to date, never been tracked by anyone
• Deferred tax is adjusted for but not fully, deferred tax assets are only counted at 15% which creates an ETR drag as they are utilised if the jurisdiction rate is higher. Oh, and if the timing differences do not fall within special buckets (“Recapture Exception Accrual), they need to be tracked and if they have not unwound within five years of being recognised, the difference needs to be adjusted.
• The rules around co-ownership are complex, joint venture structures are difficult especially in a real estate setting where they are common.
• It is not clear that investment structures that are consolidated into the MNE regime will still work without top-up tax as elections need to be made to treat them as tax transparent. Without transparency, they have to do their own ETR calculation which would often result in top-up tax, but the conditions required to make the election do not seem to cover all circumstances and structures.
• Despite 222 pages of guidance and 49 pages of examples issues it still isn’t clear how some of the more straightforward calculations are supposed to operate never mind about whether they actually work to give the required effect.

Any good news?

The OECD is still consulting on the Implementation Framework and so there remains time to make representations in particular on the safe harbours but also in relation to investment funds. Safe harbours that adjust financial income and taxes with a limited number of easy to calculate amounts would be very helpful in making the compliance more manageable. Unfortunately, although there is a little more time, the OECD consultation closes on 11 April.

There is still a chance that the US fails to amend their GILTI rules to fit in with this initiative and it already appears likely that the US will find UTPR very hard if not impossible to legislate. It seems like there is too much political will behind this to let it fail now, but you never know.

Once the implementation framework is finalised there will still be opportunities to shape domestic law and guidance but they will be limited and so it will then be necessary to move on with working out the best way to obtain the data, do the calculations, pay any top-up tax and report. Don’t be surprised if more low tax jurisdictions announce minimum tax rates, don’t be surprised if restructuring becomes beneficial in some circumstances.