This newsflash summarises three of the most important OECD and EU tax developments released in October 2023, which could potentially impact taxpayers with operations in Luxembourg:
- OECD Multilateral convention implementing Pillar 2 subject to tax rule open for signature
- DAC 8 adopted by the Council of the EU
- EU blacklist: Antigua and Barbuda, Belize and Seychelles added while British Virgin Islands, Costa Rica and Marshall Islands removed
- OECD multilateral convention implementing Pillar 2 subject to tax rule open for signature
On 3 October 2023, the OECD/G20 Inclusive Framework on BEPS announced it had concluded negotiations on a multilateral convention ("MLC") implementing the Pillar 2 subject to tax rule ("STTR"). The STTR is part of the 2-Pillar solution to address tax challenges from the digitalisation of the economy and complements the Global Anti-Base Erosion rules ("GloBE rules") that provide for a global minimum effective taxation of 15% for in-scope multinational groups (read more details on the GloBE rules here_ and here_).
The STTR has been developed as a treaty-based rule to help developing countries protect their tax base by allowing a source jurisdiction which has ceded its taxing rights (totally or partially) on certain outbound intra-group payments under a tax treaty, to recover some of those rights where the income concerned is taxed in the payee's jurisdiction at a rate below 9%. The rule broadly allows (but does not oblige) the source jurisdiction to tax the gross amount of covered income at a specified rate, equal to the difference between 9% and the tax rate applied in the residence jurisdiction.
The MLC is now open for signature by the relevant jurisdictions. More than 70 developing countries are entitled to request inclusion of the STTR in their tax treaties with treaty partners that apply corporate income tax rates below 9% to covered payments. Treaty partners who are members of the Inclusive Framework have committed to apply the STTR when requested to do so. It appears that jurisdictions that are not developing countries may also request implementation of the STTR in their tax treaties.
Interaction with GloBE rules
The STTR will apply before the GloBE rules. The STTR will be taken into account for the computation of the GloBE effective tax rate and thus the potential application of the qualified domestic minimum top-up tax ("QDMDT"), the income inclusion rule ("IIR") and the undertaxed payments rule ("UTPR").
The STTR's scope differs from that of the GloBE rules. In particular, the STTR is not limited to members of multinational groups meeting the revenue threshold applicable for the purposes of the GloBE rules. In addition, specific exclusions and thresholds apply, as described below.
Personal scope
The STTR only applies to covered payments between connected parties, which broadly means a control relationship or the direct or indirect holding by one person of more than 50% of the beneficial interest or the aggregate vote and value in the other person.
However, the STTR will not apply to payments made to a list of excluded recipients, including individuals, non-profit organisations, States and certain government entities, pension funds, investment funds (subject to certain conditions), and certain entities wholly-owned or virtually wholly-owned by an excluded recipient.
Covered payments
The STTR will apply to seven categories of income ("covered income"): (i) interest, (ii) royalties, (iii) payments made in consideration for the use of, or the right to use, distribution rights in respect of a product or service, (iv) insurance and reinsurance premiums, (v) fees to provide a financial guarantee, or other financing fees, (vi) rent or any other payment for the use, or the right to use, industrial, commercial or scientific equipment, and (vii) any income received in consideration for the provision of services.
However, the STTR will not apply if the gross amount of covered income (except for interest or royalties) does not exceed the recipient's costs for the activity giving rise to the income + 8.5% ("mark-up threshold test").
Materiality threshold
The STTR will not apply where the total gross amount of covered income paid by persons in a source jurisdiction to a connected payee in the residence jurisdiction is less than EUR 1 million in the fiscal year concerned. This threshold is reduced to EUR 250,000 in the fiscal year concerned where one of the contracting States has a gross domestic product of less than EUR 40 billion on the date of the entry into effect of the STTR.
Tax rate test
The tax rate considered in the payee jurisdiction is the statutory rate of tax applicable to the relevant covered income. Where the payee benefits from a preferential adjustment on this income (such as a full or partial exemption, or a deduction from the tax base), the rate will be determined after consideration of this preferential adjustment.
An anti-avoidance rule will apply to this test, targeting particular abuses to escape the STTR, such as back-to-back payment arrangements designed to sever the connection between a payer and a connected payee or to interpose a connected person subject to a tax rate of 9% or more.
To view the full article please click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
