As the spotlight shines on the International Fiscal Association (IFA) Annual Congress in Cape Town, Dr Franklin Cachia, Director & Lead Consultant at CSB Group, is actively participating in discussions that are shaping the future of international taxation. The 76th Congress has become a focal point for global tax experts and policymakers, with Pillar Two taking centre stage this morning. This innovative framework, designed by the OECD, aims to establish a global minimum tax rate for multinational enterprises, ensuring fairness and accountability in international tax practices.
But what is Pillar Two?
Simply put, the OECD's Pillar Two (2) global minimum tax framework, focuses on ensuring that multinational enterprises (MNEs) with significant revenue pay a minimum effective tax rate of 15% on profits in every jurisdiction they operate.
Scope of GloBE Rules: MNE Group are entities with consolidated revenue exceeding €750 million. The GloBE rules aim to include entities within a group's consolidated financial statements.
Excluded Entities government bodies and international organisations, are exempt from these rules.
Jurisdictional Scope: Covers entities and permanent establishments (PEs) across different jurisdictions, requiring tax presence to classify an MNE for GloBE purposes.
GloBE income starts from Financial Accounting Net Income or Loss (FANIL) of each Constituent Entity, adjusted for items not typical in taxable income (e.g., certain policy disallowed expenses). Adjustments Involve excluding dividends, equity gains/losses, and certain disposition gains, especially regarding assets under GloBE reorganisations.
Top-up Tax (TUT): TUT is determined by applying a jurisdictional Effective Tax Rate (ETR). If ETR falls below 15%, a TUT is triggered.
Excess Profits and Exemptions: Calculates excess profits by deducting Substance-Based Income Exclusions (SBIE) from net GloBE income, applying specific carve-outs for payroll and tangible assets.
The Income Inclusion Rule (IIR) and Under-Taxed Payment Rule (UTPR) determine TUT allocations across parent entities and affected jurisdictions. The UTPR particularly addresses payments that reduce tax liability through profit-shifting mechanisms.
Which entity pays the new tax?
The responsibility for paying the top-up tax (TUT) generally depends on which rule applies:
IIR = This rule usually assigns the responsibility for paying the TUT to the Ultimate Parent Entity (UPE) of the multinational enterprise (MNE) group if any Constituent Entities (subsidiaries or PEs) have a jurisdictional Effective Tax Rate (ETR) below the minimum 15%. In this case, the UPE would calculate the additional tax required to bring the ETR up to 15% on behalf of its low-taxed subsidiaries and pay the top-up amount.
UTPR = If the IIR cannot be applied (e.g., if the UPE is in a jurisdiction that does not implement the IIR), the UTPR shifts the tax obligation down to other Constituent Entities within the group that are located in jurisdictions applying the GloBE rules.
In essence, if the UPE is in scope and its jurisdiction applies the IIR, it generally bears the responsibility for TUT. If other entities are in jurisdictions that apply the UTPR, those entities may bear the TUT if the UPE cannot apply the IIR.
At the International Fiscal Association (IFA) Annual Congress, Dr Cachia is not only contributing to vital discussions surrounding Pillar Two but also gaining insights that will undoubtedly influence tax advisory practices at CSB Group. As the dialogue around global tax reform continues to evolve, the outcomes of this congress will play a crucial role in shaping the future of taxation for multinational enterprises. The engagement of leaders like Dr Cachia highlights the importance of collaboration and expertise in navigating the complexities of international fiscal policy.
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.
