Global Minimum Tax

Profit making entities have to pay taxes on the taxable income earned to the resident country or the parent country of the business which is determined by the bilateral tax treaties. Higher the income more is the tax.

Hence, Multi National Entities (MNE’s) make certain artificial arrangements to allocate work in a low-tax jurisdiction so that the taxable income will be comparatively lower than the high-tax jurisdiction resulting in increased profits in the low-tax jurisdictions. To curb this kind of arrangement Base Erosion Profit Shifting (BEPS). The Inclusive Framework on Base Erosion and Profit Shifting (BEPS) was established in June 2016 and brings together 140 countries and jurisdictions to collaborate on the implementation of the OECD / G20.

To address the taxation challenges of the rapidly growing digital economy, OECD initiated a project that seeks to address the tax challenges of the digitalisation of the economy commonly known as BEPS 2.0. 136 out of the 140 countries have agreed to this plan including India. On 8 October 2021, 136 countries and jurisdictions joined a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.

The BEPS 2.0 project is broadly divided into 2 pillars.

Two parallel elements:

ØPillar 1: revisions to profit allocation and nexus rules to allocate more taxing rights to market countries.

Ø Pillar 2: establishing new global minimum tax rules to ensure that all business income is subject to at least an agreed minimum level of tax.

 Pillar 2 of the Model talks about implementation of Global Minimum Tax [GMT]. GMT  refers to the key components which are commonly referred to as the Pillar Two or GloBE which introduces a minimum effective tax rate of at least 15%, calculated based on a specific rule set. Groups with an effective tax rate below the minimum in any particular jurisdiction are required to pay top-up tax to the tax authority in the head office location or another group companies’ location in certain situations.

It consists of three rules which grants jurisdictions 3 additional taxation rights. The first two rules together are also referred to as the Global anti-Base Erosion Rules (GloBE) rules.

A. GloBE Rule  

a)     an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of that is taxed at less than a minimum effective rate of 15%

b)    a supporting Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low-tax income of a constituent entity is not subject to tax under IIR.

B. Treaty based Rule

A treaty-based rule (the Subject to Tax Rule (STTR)) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate. The STTR will be creditable as a covered tax under the GloBE rules.

Rule status:

The GloBE rules will have the status of a common approach.

This means that members:

•  Are not required to adopt the GloBE rules, but, if they choose to do so, they will implement and administer the rules in a way that is consistent with the outcomes provided for under Pillar Two, including in light of model rules and guidance agreed to by the IF;

•  Accept the application of the GloBE rules applied by other IF members including agreement as to rule order and the application of any agreed safe harbours.

On 2 February 2023 OECD realsed an Administrative Guidance on the Global AntiBase Erosion Model Rules (Pillar Two) related to the 15% global minimum tax on multinational corporations.

The administrative guidance consists of five chapters:

Chapter 1: Scope

Chapter 2: Income & taxes

Chapter 3: Application of GloBE Rules to insurance companies

Chapter 4: Transition

Chapter 5: Qualified Domestic Minimum Top-up Taxes

For administrative guidance : https://www.oecd.org/tax/beps/agreed-administrative-guidance-for-the-pillar-two-globe-rules.pdf