MACROECONOMICS, TRADE AND INVESTMENT MACROECONOMICS, TRADE AND INVESTMENT EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT The Global Minimum Tax: from agreement to implementation POLICY CONSIDERATIONS, IMPLEMENTATION OPTIONS, AND NEXT STEPS David O’Sullivan and Ana Cebreiro Gómez © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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License: Creative Commons Attribution CC BY 3.0 IGO. Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third- party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@ worldbank.org. ABSTRACT In October 2021, a historic two-pillar international agreement was reached among 137 countries of the OECD/G20 Inclusive Framework on BEPS to address the twin challenges of globalization and digitalization. Pillar One will reallocate tax revenues to the country of the consumer. Pillar Two introduces a global minimum effective tax for MNEs (GMT). This paper focuses on implementation of the GMT. It provides an overview of the core GMT rules, examines implementation by countries thus far, evaluates the key policy considerations (including the impact on tax incentives), and provides a framework for evaluation of the implementation options. The paper also makes recommendations on practical steps in the implementation process, including administrative issues and consultation with key stakeholders. These discussions are expected to be particularly relevant for developing countries. >>> Table of Contents Glossary 8 Executive Summary 11 1. Introduction 16 Context 16 Objective of the paper 16 A decade-long journey of corporate tax reform 17 Potential impact of the International Tax 18 Agreement on developing countries The investment landscape 18 The design of Pillar Two—Global 19 Minimum Effective Tax Rate Providing guidance and assistance to 19 countries in implementation 2. Global implementation—state of play 22 Current state of play 22 3. The corporate income tax landscape today 25 Corporate income tax rates 25 Countries with in-scope entities 26 with ETRs less than 15% Tax incentives under the current tax rules 26 4. Policy considerations for developing countries 29 Overview 29 The nature of the GMT Rules 30 Broad policy considerations for 30 implementing the core GMT rules The consequences for a country that does 30 not implement the core GMT rules 4 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION Other implementation considerations—the 31 threshold decision and company migration Interaction between the GMT rules and US GILTI 31 5. Ensuring that tax incentives are GMT compliant 33 Implications for existing tax incentive regimes 33 Substance-based income exclusion 33 (substance carve-out) Qualifying tax credit regimes 34 Compatibility of tax incentives with 34 the Global Minimum Tax Managing the transition for tax incentives 35 6. Policy options for implementation of the Global 37 Minimum Tax and broader corporate tax reforms Guidance on policy options 37 Policy options 38 Level 1 measures—protecting the tax base 38 Level 2 measures—implement the 40 core Global Minimum Tax rules Level 3 measures—consideration of broader 41 corporate income tax reforms Implementation of the Global Minimum Tax— 41 decision matrix for developing countries Policy considerations on scenarios 42 Key takeaways 43 7. A roadmap toward implementation 45 Recommendation 1—Confirmation the country will ensure compatibility with GMT rules 45 and evaluate implementation options Recommendation 2—Carry out preparatory 46 work for implementation Recommendation 3—Stakeholder engagement 46 World Bank support 46 THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 5 Annex 1 – October 2021 International Tax Agreement for 48 Pillar Two Annex 2 – State of Play of Global Implementation of Pillar 50 Two (as of August 2022) Canada implementation 50 European Union implementation 50 Republic of Korea implementation 50 Malaysia implementation 51 Mauritius implementation 51 New Zealand implementation 51 Switzerland implementation 51 United Kingdom implementation 51 United States implementation 52 Annex 3 – Identifying in-scope MNEs and estimating 53 revenues 1. Identifying in-scope MNEs 53 Using aggregate CbCR data 53 Individual country analysis 54 Country level analysis 55 2. Guidance to assist in calculating revenue gains in 56 implementing the IIR Calculation of Top-up Tax at entity level (static analysis) for a sample of companies 56 and scale up to the full population Annex 4 – Examples of compliant and non-compliant tax 57 credits and implications Annex 5 – Guidance on developing a consultation strategy 59 Overview 59 Consultation design 59 6 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION ACKNOWLEDGEMENTS This report was prepared by Ana Cebreiro Gómez and David O’Sullivan as a product of the Global Tax Program (GTP) under the Equitable Growth, Finance, and Institutions (EFI) Vice Presidency. It draws on a range of World Bank’s operational engagements in the areas of tax policy and administration. The authors are very grateful to the comments and observations of peer reviewers Daniel Bunn (Executive Vice President, Tax Foundation), Giorgia Maffini (Special Advisor, PwC), Sonia Araujo (Senior Economist, WB) and Sebastian James (Senior Economist, WB). They also thank Marcello Estevão (Global Director of the World Bank Group’s Macroeconomics, Trade and Investment Global Practice (MTI), Chiara Bronchi (Practice Manager, WB), Jonathan Leigh-Pemberton (International Tax Consultant, WB) and Cristian Lucas (International Tax Consultant, WB) for their valuable inputs and comments. Excellent administrative support by Latifah Alsegaf is also acknowledged. The authors commend the outstanding and professional work of the graphical designers, Kilka diseño grafico, and editing and proofing by Richard Alm. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 7 >>> Glossary This glossary summarizes important concepts discussed in this paper to facilitate the reader’s comprehension. It focuses on the key terms of the International Agreement to tax multinationals, with a particular emphasis on the Global Minimum Tax (Pillar Two). For a detailed explanation of the Pillar Two rules, see Understanding The Global Minimum Effective Tax on Multinationals: Pillar 2: General Principles, Overview and Scope. Base Erosion and Profit Shifting Project (BEPS): The OECD/G20 Base Erosion and Profit Shifting Project (or BEPS Project) is an initiative to set up an international framework to combat tax avoidance by multinational enterprises (MNEs) that use base erosion and profit shifting tactics. The project, led by the OECD’s Committee on Fiscal Affairs, began in 2013 with OECD and G20 countries (https://www.oecd.org/tax/beps/). BEPS Actions: Under a mandate from the G20, the OECD countries and associates developed and agreed on a series of actions to address base erosion and profit shifting by large multinationals in 2015. These actions included measures to address mismatches between tax systems that were being exploited through aggressive tax planning and to ensure there was a floor under intense tax competition by countries to curb further erosion of tax bases globally. The BEPS Actions1 included four minimum standards that serve as key cornerstones of the BEPS project: Action 5—Combatting harmful tax regimes; Action 6—Prevention of tax treaty abuse and countering treaty shopping; Action 13—Country-by-Country Reporting; and Action 14—Mutual Agreement Procedures (MAP). Country-by-Country Reporting (CbCR): Under BEPS Action 13, all large multinational enterprises (MNEs) are required to prepare country-by-country reports with aggregate data on the global allocation of income, profit, taxes paid, and economic activity among tax countries in which it operates. The OECD publishes aggregate CbCR data, including the number of MNE entities within a country, the number of employees, revenue, profit, and effective tax rates. Effective Tax Rate (ETR): An underlying GMT principle is the 15% minimum effective rate, calculated on a jurisdictional blended basis2 using recognized accounting standards and accepted methodologies for calculating taxable income in accordance with the GMT’s Model Rules. In this paper, references to ETR rates paid by MNEs in countries are not calculated using the GMT base, but rather are estimates of the ETR paid using other sources (e.g., country-by- country reporting or using business databases, such as ORBIS). 1 https://www.oecd.org/tax/beps/beps-actions/. 2 It is the ETR of the MNE as a group (not each entity) within the jurisdiction. 8 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION Global Intangible Low-Taxed Income (GILTI): GILTI is a of the GMT rules that will facilitate coordinated outcomes for special way to calculate a US multinational company’s foreign both tax administrations and MNE groups. earnings to ensure it pays a minimum level of taxes. GILTI was adopted as part of the 2017 Tax Cuts and Jobs Act (TCJA). Implementation Framework: The October 2021 Unlike the Global Minimum Tax (GMT), which is calculated International Tax Agreement provided for the development on a country-by-country basis, GILTI is calculated on a global of an Implementation Framework to facilitate the coordinated blending basis—i.e., a rate of 0% paid in one country can implementation and administration of the GMT. The framework be blended with a rate of 35% paid in another country. The will provide agreed administrative procedures, such as filing current GILTI rate is 10.5% which will increase to 13.125% in obligations and multilateral review processes as well as 2026. The US permits 80% of the tax paid to be considered consider the development of safe harbors to facilitate both a foreign tax credit, therefore the effective rate is currently compliance by MNEs and administration by tax authorities. 13.125% rising to 16.4% in 2026. Income Inclusion Rule (IIR): The core GMT rule is the Global Anti-Base Erosion Rules (GLoBE): GLoBE is the Income Inclusion Rule (IIR). It allows the country of an MNE’s official name of the architecture that will underpin operation of Ultimate Parent Entity (UPE) to impose Top-up Tax on the the Pillar Two Global Minimum Tax. The core GLoBE Rules are parent entity equal to the insufficiently taxed income of its the Income Inclusion Rule (IIR) and the Undertaxed Payments foreign subsidiaries. For example, if a subsidiary pays 10% Rule (UTPR). In this paper, we refer to the GLoBE Rules as tax on profits of USD 1 billion in a particular country (i.e., USD the Global Minimum Tax (GMT) rules. 100 million), the home country of the UPE can apply a GMT Top-up Tax of an additional 5% tax on those profits (i.e., USD Global Minimum Tax Model Rules3 and Commentary:4 50 million). The October 2021 International Tax Agreement foresaw the need for Model Rules and Commentary to underpin the Global In-scope MNEs: The GMT rules apply to MNEs that meet Minimum Tax (GMT). EUR 750 million threshold as determined under BEPS Action 13 (country-by-country reporting). Countries are free to apply The Model Rules are intended to provide governments with the IIR to MNEs headquartered in their country even if they a precise template for implementing the GMT, providing an do not meet the threshold. The GMT will also provide for a essential reference point for countries legislating for the GMT. de minimis exclusion for those jurisdictions where the MNE The rules provide for a coordinated system of interlocking has revenues below EUR 10 million and profits below EUR 1 rules that: define the MNEs within the scope of the minimum million. (For details see Understanding The Global Minimum tax; set out mechanisms for calculating an MNE’s effective tax Effective Tax on Multinationals: Pillar 2: General Principles, rate on a jurisdictional basis and for determining the amount Overview and Scope). of Top-up Tax payable under the rules; and impose the Top-up Tax on a member of the MNE group in accordance with an OECD/G20 Inclusive Framework (IF) on BEPS: The IF agreed rule order. was established in 2016 to ensure interested countries and jurisdictions, including developing economies, can participate The rules also address the treatment of acquisitions and on an equal footing in the development of standards on BEPS- disposals of group members and include specific rules to deal related issues while reviewing and monitoring implementation with particular holding structures and tax neutrality regimes. of the BEPS Project. There are currently 141 IF members.5 The rules address administrative aspects, including information filing requirements, and provide for transitional rules for MNEs Pillar One: Pillar One of the International Tax Agreement will that become subject to the global minimum tax. re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities The Commentary provides MNEs and tax administrations and earn profits, regardless of whether firms have a physical with detailed and comprehensive technical guidance on the presence there. Specifically, MNEs with global sales above operation and intended outcomes under the rules and clarifies EUR 20 billion and profitability above 10% will be covered by the meaning of certain terms. It also illustrates the application the new rules, with 25% of profit above the 10% threshold to of the rules to various fact patterns. The Commentary is be reallocated to market jurisdictions. Pillar One also seeks intended to promote a consistent and common interpretation to simplify transfer pricing rules for baseline marketing and 3 https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.pdf. 4 https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two-commentary.pdf. 5 https://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 9 distribution activities. The IF is developing a multilateral envisaged under Pillar One—the Marketing and Distribution convention (MLC), aiming to be ready for countries’ signatures Safe Harbor. around mid-2023, with ratification to follow. Subject-to-Tax Rule (STTR): Although part of Pillar Two, the Pillar One Amount A: This is the amount of profits to be STTR is separate to the GMT rules. This rule denies treaty reallocated to countries under Pillar One of the International benefits when IF members apply nominal corporate income Tax Agreement. tax rates below the agreed STTR rate to interest, royalties, and a defined set of other payments. The taxing right will be Pillar One Amount B: This aims to standardize the limited to the difference between the minimum rate and the remuneration of related-party distributors that perform tax rate on the payment. The minimum rate for the STTR is baseline marketing and distribution activities in a manner set at 9%. The implementation of this rule requires changes to that is aligned with the arm’s length principle. Its purpose domestic legislation and tax treaties. is two-fold: 1) simplify the administration of transfer pricing rules for tax administrations and reduce compliance costs for Substance-based income exclusion (substance carve- taxpayers; 2) enhance tax certainty and reduce controversy out): GMT rules include a formulaic carve-out designed to between tax administrations and taxpayers. approximate the level of substance in the jurisdiction. This substance-based income exclusion provides that the taxable Pillar Two: Pillar Two of the International Tax Agreement base of the GMT is reduced by a percentage of payroll costs centers on the Global Minimum Tax of 15% and the Subject- and the carrying value of tangible assets. The percentage of to-Tax Rule. payroll costs starts at 10% and is gradually reduced each year until 2033, when it will be 5%. The percentage of the carrying Qualified Domestic Minimum Top-up Tax (QDMTT): The value of tangible assets starts at 8%, gradually declining each QDMTT is a domestic Top-up Tax a country can introduce to year until it reaches 5% in 2033. ensure that the MNE pays a minimum tax within the country. It prevents the application of the IIR and UTPR. The QDMTT is Undertaxed Payments Rule (UTPR): The UTPR is the fully creditable against any liability under the GMT, preserving secondary rule under the global minimum tax—i.e., it will apply a jurisdiction’s primary right of taxation over its own income. after the IIR and serve as a backstop to the IIR. The UTPR To ensure the integrity of the GMT, there is expected to be a would apply if, for example, the jurisdiction in which a group formal IF process to review and qualify the domestic Top-up is headquartered has an effective tax rate below the minimum Taxes countries introduce. tax rate (the IIR itself does not apply to the headquarters’ jurisdiction). Any Top-up Tax then would be collected under Safe Harbors: The GMT Implementation Framework will the UTPR by countries in which other group companies are include safe harbors and/or other mechanisms to ensure the located. The rule is scheduled to come into effect one year administration of GMT rules is as targeted as possible and after the IIR. The UTPR is also known as the Undertaxed to avoid compliance and administrative costs disproportionate Profits Rule because it denies deductions or equivalent to the policy objectives. There is a separate safe harbor adjustments for undertaxed payments. 10 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION >>> Executive Summary INTRODUCTION The past decade has seen a period of reforms of the international tax framework to address base erosion and profit shifting, particularly through the Base Erosion and Profit Shifting (BEPS) Actions. The BEPS project made great strides in addressing low and zero taxation, increased tax transparency, ensuring multinational enterprises (MNEs) would need substance in profit- earning countries, and put in place multilateral mechanisms for dispute resolution. However, the international tax framework remained under stress due to increasing globalization and the digitalization of the economy. Globalization has created opportunities for MNEs to arrange their businesses to minimize their global tax bills, often by shifting profits to jurisdictions, sometimes through complex mechanisms with little commercial rationale. Digital businesses do not require a physical presence in a jurisdiction where they earn large profits. In many cases, they pay little or no tax on income or profits generated within the jurisdiction. In October 2021, a historic two-pillar international agreement was reached among 137 countries of the OECD/G20 Inclusive Framework on BEPS (hereafter, the IF) to address the twin challenges of globalization and digitalization. Pillar One will reallocate tax revenues to the country of the consumer. Pillar Two introduces a global minimum effective tax for MNEs. These are two distinct but connected pillars. This paper focuses on implementation of the global minimum effective tax, Pillar Two. THE DESIGN OF PILLAR TWO—GLOBAL MINIMUM E F F E C T I V E TA X R AT E ( T H E G M T ) The GMT is designed to ensure that large MNEs (annual revenue greater than EUR 750 million) pay a minimum effective tax of 15%. The purpose is to address the ongoing concerns about tax avoidance by MNEs and the so-called “race to the bottom” on corporate tax rates. Countries, including non-members of the IF,1 could have high economic and fiscal incentives to implement Pillar 2. The GMT’s design means that a country can apply a Top-up Tax to the subsidiary2 of an MNE that has been taxed below the minimum effective rate. If a country doesn’t 1 Pillar 2 is non-mandatory (called common approach); i.e., countries are not required to implement the rules. By joining the multilateral agreement, however, they accept its adoption by others and commit to follow the agreed rules. 2 This is calculated on the basis of the effective tax rate (ETR) of all the entities within a particular country; i.e., there can be blending of rates within a country. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 11 apply the GMT rate, it means that another jurisdiction (the zero or low rates that result in an ETR of less than 15%, and source country or other countries in which the MNE carries certain incentives will no longer be GMT compliant, such as tax on its business activities) 3 will collect those taxes. This holidays and zero-tax zones. Countries will still have scope to eliminates the “advantage” of the country. Therefore, zero and introduce Pillar Two-compliant incentives. low corporate income tax (CIT) countries have an incentive to implement Pillar Two as an opportunity to claim some Despite the growing global prevalence of tax incentives, revenues that would otherwise be claimed by others. For empirical evidence finds they play a limited role in influencing many countries, this can be achieved through implementation investor decisions and often lead to fiscal losses, especially of a Qualified Domestic Minimum Top-up Tax (QDMTT). in low-income countries that are already struggling with revenue mobilization. As long advocated by the World Bank and other development partners, it is essential that countries consider non-tax factors to strengthen a country’s investment T H E I M P O RTA N C E O F P I L L A R T W O attractiveness, including the general business environment, FOR DEVELOPING COUNTRIES investment in infrastructure and people/skills, and a strong The GMT is an important development for the international tax public administration. framework and will benefit developing countries. The minimum effective tax rate of 15% under Pillar Two PROGRESS TOWARD is expected to lead to an increase in global corporate tax I M P L E M E N TAT I O N revenues. The OECD has estimated that the minimum effective tax rate will result in the collection of USD 150 billion There has been remarkable progress by the IF in developing the in new revenues annually.4 architecture to underpin the GMT with Model Rules finalized in December 2021 and the Commentary agreed to in early 2022. This revenue gain is expected to come from two sources: Work continues on the detailed Implementation Framework, including further administrative guidance, simplifications, and 1 Jurisdictions will increase tax rates or introduce a safe harbors. Implementation is now expected to be in 2024. Qualified Domestic Minimum Top-up Tax to ensure that insufficiently taxed profits in the jurisdiction are taxed Countries are also taking steps to implement the global at the minimum tax rate. Failing this, the jurisdiction of minimum tax. In this context, the European Union is close to the parent entity will collect the Top-up Tax, or it can agreeing on the Directive,5 which will underpin implementation be collected as a backstop by other jurisdiction(s) with in the 27 EU Member States. Countries have launched public subsidiaries. consultations on implementation —including Canada, Ireland, Malaysia, New Zealand, the Republic of Korea, Switzerland, 2 Pillar Two is expected to reduce the incentive for MNEs and the United Kingdom. Switzerland, the United Kingdom, and to shift profits to no or low-tax jurisdictions. the Republic of Korea publishing draft legislation to implement However, the rules are complicated and countries—particularly the Income Inclusion Rule (IIR). Mauritius has published draft low-capacity ones—will need to consider implementation legislation to implement the QDMTT, and the US administration options as well as estimating potential revenue impacts. is advocating legislation to closer align the existing minimum tax (GILTI) with the new GMT. More countries have signaled that they are evaluating implementation options. THE INVESTMENT LANDSCAPE The GMT will have profound implications on countries’ use of tax policy to attract inbound investment from MNEs—whether K E Y P O L I C Y C O N S I D E R AT I O N S through statutory tax rates or tax incentives, such as tax holidays, The GMT will have implications for many countries, although zero-tax zones, and tax credits. With GMT implementation, needed actions will depend on individual circumstances. For countries will no longer be able to attract investment through 3 Pillar 2 rules that allow for Top-up Taxes on the profits of foreign subsidiaries that have effective tax rates of less than 15%. Top-up taxation involves two concepts—the Income Inclusion Rule (IIR) by a parent jurisdiction and the Undertaxed Profits Rule (UTPR) by other jurisdictions in which the MNE carries on its business activities. They are collectively known as the Global Anti-Base Erosion (GLoBE) rules. 4 https://www.oecd.org/tax/international-community-strikes-a-ground-breaking-tax-deal-for-the-digital-age.htm 5 Twenty-six of the 27 EU Member States have agreed the proposed Directive. 12 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION instance, 23 countries currently have ETRs6 below the 15% • Are tax incentives within the country compatible with the minimum rate, and many others have tax incentive regimes GMT rules? If not compatible, could this impact private that include tax holidays, zero-tax zones, and tax credits, which investment? can mean that MNEs have an effective tax rate below 15%. Countries should take steps to analyze their CIT regimes POLICY OPTIONS to consider implementation options. In this context, implementation choices will depend on the following questions: The global minimum effective tax rate for MNEs is a fundamental change to the international tax framework, and • Are there entities within the country that are within the many jurisdictions will need to make reforms, whether to scope of the GMT rules—i.e., the threshold of global protect the tax base, to implement GMT rules, or to carry out a annual revenues of EUR 750 million? deeper (tax and investment policy) reform process. Countries have implementation options, but what they decide to do will • If there are in-scope entities in the country, what is the depend not only on their own circumstances, including policy effective tax rate applicable to those entities (the GMT choices, but also the ongoing work at the IF to finalize the base and detailed rules may be different depending on Implementation Framework. the country’s tax code)? • Are there US headquartered MNEs within the country A framework for considering these options is indicated affected by potential differences between US GILTI and below: the GMT? STATUS QUO LEVEL 1 LEVEL 2 LEVEL 3 PROTECTING THE TAX BASE IMPLEMENTING THE CORE GMT RULES CONSIDER BROADER CIT REFORM Do nothing Introduce a Evaluate and Implement IIR Implement UPTR Broader CIT Optimize tax QDMTT reform tax *UTPR comes rate reform incentive offering incentive regime into effect one to the GMT rules year after IIR OPTION 1: ‘DO NOTHING’ OPTION 3: EVALUATE AND REFORM TAX The nature of the GMT rules and the common approach means INCENTIVES TO BE IN LINE WITH THE GMT a country does not need to implement the model rules. The The GMT rules are likely to have implications for the viability “do nothing” option is on paper feasible under the agreement, of certain tax incentives. Therefore, it is prudent for countries but it is not without risks, particularly for a country foregoing to carry out an evaluation of their incentive regime. This is tax revenues because another country is topping-up taxes. particularly relevant in cases where the tax provision (or a combination of reliefs) could lead to a scenario of an ETR of LEVEL 1 MEASURES— less than 15%. P R OT E C T I N G T H E TA X B A S E LEVEL 2 MEASURES— A specific feature of the GMT rules is that undertaxed profits IMPLEMENT THE CORE GMT can be topped up in other countries. It is recommended that RULES countries take actions to ensure they do not lose tax revenues to other countries, thus the need to protect its tax base. Level 2 measures are the implementation of the core GMT rules, the Income Inclusion Rule (IIR) and the Undertaxed OPTION 2: INTRODUCE A QUALIFIED DOMESTIC Payments Rule (UTPR). The policy impetus for introducing MINIMUM TOP-UP TAX these rules will depend on country-specific circumstances, Countries can introduce their own Qualified Domestic Minimum particularly the profile of MNEs in the country, the applicable Top-up Tax (QDMTT) based on the GMT mechanics, which ETR, and implementation of Level 1 measures. is then fully creditable against any liability under the GMT, preserving the jurisdiction’s primary right of taxation over its own income. 6 Source: World Bank Global Marginal Effective Tax Rate (METR) Database Report THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 13 OPTION 4: INTRODUCE THE INCOME INCLUSION well as avoiding low taxation of MNEs and top-up of taxes by RULE other countries under the IIR or UTPR. Countries may also IIR is the core GMT rule. It is imposed on a parent entity after consider new incentives that are compatible with GMT rules. considering the insufficiently taxed income of a constituent entity. Whether a country implements the IIR will primarily depend I M P L E M E N TAT I O N R O A D M A P on whether it has UPEs of MNEs within its jurisdiction. Having It is recommended that countries take concrete steps now UPEs within the country creates a strong case for implementing to prepare for the introduction of the GMT, recognizing that the IIR. If a country does not have UPEs, there should not be change creates uncertainty. This can be addressed through an immediate requirement to implement the IIR. solid planning, good analysis, and open communications. OPTION 5: INTRODUCE THE UNDERTAXED The World Bank recommends that countries: PAYMENTS RULE (UTPR) The UTPR will be particularly relevant for countries who have 1. ENSURE COMPATIBILITY WITH THE GMT RULES in-scope entities of MNEs and where the country/countries of AND EVALUATE IMPLEMENTATION OPTIONS the UPE of MNEs do not implement the IIR. The agreement Countries may wish to signal that they will ensure that their envisions that the UTPR will come into effect one year after tax codes will be compatible with the October 2021 agreement the IIR, allowing countries to defer decisions on implementing and GMT rules. Since work on practical implementation issues the UTPR. is still ongoing at the OECD, it would be premature to finalize implementation at this point. LEVEL 3 MEASURES— C O N S I D E R AT I O N O F 2. CARRY OUT PREPARATORY WORK FOR IMPLEMENTATION B R O A D E R C O R P O R AT E It is recommended that countries already start the preparatory I N C O M E TA X R E F O R M S work for determining what reforms to their CIT regimes will be necessary to ensure conformity with the GMT. The GMT is a significant development in international taxation. The core GMT rules, the IIR and the UTPR, are complex and 3. ENGAGE WITH STAKEHOLDERS it may not be necessary for all countries to implement them. It is important that countries engage with stakeholders on However, this new international tax framework may provide implementation of the International Tax Agreement (specifically opportunities for countries to reshape their CIT regimes, the GMT rules). Such communications can bring greater whether by broadening the tax base or initiating tax rate certainty to taxpayers, minimize disputes, and facilitate policy reforms, including revisiting their current tax incentives regime development. designed to attract investment. OPTION 6: CONSIDER BROADER CIT REFORM, INCLUDING RATE POLICY WORLD BANK SUPPORT An option for countries is to review their overall CIT regime to The GMT is very complex and uses new concepts in taxation. ensure that it is optimized for the new Pillar Two environment. It is based on financial accounts, there is no one-size-fits-all Options include rate policy, simplification of the tax code, and solution, and implementation will provide challenges for both base broadening. These options have the potential for an developed and developing countries alike. overall increase in tax revenues and investment attractiveness, although the choices and outcomes will depend on the The World Bank stands ready to support developing circumstances within individual countries. countries in implementing the rules. OPTION 7: OPTIMIZE TAX INCENTIVE OFFERING Such support can include regional seminars with deep WITHIN THE GMT RULES dives on the rules, technical assistance to countries on impact Option 3 advocates that countries should review and reform assessments, analysis of policy options, evaluation of tax tax incentives regimes to be compatible with Pillar Two GMT incentives, and legislative drafting. rules. These are important steps in protecting the tax base as 14 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION 1. >>> Introduction CONTEXT The international tax framework has been under exceptional stress due to increasing globalization and the digitalization of the economy. Globalization has created opportunities for MNEs to arrange their businesses to minimize their global tax bills, often by shifting profits to jurisdictions, sometimes through complex mechanisms with little commercial rationale. Digital businesses do not require a physical presence in a jurisdiction where they earn large profits. In many cases, they pay little or no taxes on income or profits generated within the jurisdiction. The IMF estimates that tax avoidance and profit shifting in developing countries results in USD 200 billion per year in lost revenue from corporate income taxes. This is equivalent to the estimated revenue loss from the COVID-19 pandemic and larger than the official development assistance (ODA) developing countries receive each year. OBJECTIVE OF THE PAPER The OECD/G20 Inclusive Framework on BEPS reached an agreement in October 2021 on a two-pillar solution to address the tax challenges of digitalization (Pillar One) and aggressive tax competition (Pillar Two). This paper focuses on Pillar Two, specifically on the rules designed to put a floor under tax competition through the global application of a 15% minimum effective tax rate (GMT). The agreement’s complexity will bring implementation challenges to many countries, particularly low-capacity ones. However, the introduction of the GMT can provide an opportunity for developing countries to reform and improve their current corporate tax regimes. Such reforms can provide a more sustainable and stable corporate tax regime to achieve the objectives of raising tax revenues to fund vital public services and, at the same time, delivering a tax code that can promote investment and growth. This paper provides an analysis of the GMT’s key elements and the practical implications for countries, including information on corporate tax policy and incentives, the policy options available to countries that decide to implement GMT rules, and recommendations for an implementation roadmap. This paper is the first of a series that will provide further guidance to countries as they navigate implementation of the new international tax framework. A DECADE-LONG JOURNEY OF While notable progress has been made, the corporate tax policy landscape has been dominated since 2015 by the C O R P O R AT E TA X R E F O R M part of the negotiation where agreement was not reached The past decade has seen an intensive period of activity in during the BEPS process—Action 1: Addressing the Tax bringing much needed reforms to an international tax framework Challenges of Digitalization. These discussions had focused that was creaking under the pressures of digitalization and on structural challenges to the international tax system arising globalization, diminishing the tax base of source countries. from digitalization and new business models; specifically, Much of this reform was driven by the G20 and OECD where large MNEs were able to achieve scale without mass countries, but in recent years non-OECD countries, including in market countries, resulting in the erosion of existing tax developing and emerging economies, have taken a far more bases. Several countries saw potential in introducing revenue- pro-active role in shaping the tax reform agenda through the based digital services taxes to address under-taxation in OECD/G20 Inclusive Framework on BEPS (hereafter the IF). market jurisdictions. However, digital services taxes proved It now has representation from 141 countries.1 controversial and subsequently were a driver of trade disputes, and international consensus was not reached by 2018 on a Under the G20 mandate, the OECD countries and associates common approach. developed and agreed in 2015 a series of actions to address base erosion and profit shifting by large multinationals. These In 2019, the IF agreed that a two-pillar solution should actions included measures to address mismatches between be developed with Pillar One allocating a portion of profits tax systems that were being exploited through aggressive to market countries (i.e., where consumed) and Pillar Two tax planning and to ensure there was a floor on intense tax addressing remaining BEPS issues through the adoption of competition by countries to curb further erosion of tax bases a GMT. globally. Blueprints for the two pillars were developed through OECD The BEPS Actions2 included four minimum standards that working parties, accepted by the IF, and published in October serve as key cornerstones of the BEPS project: 2020,4 with public consultations following and a clear objective to reach agreement by mid-2021. Significant progress was • Action 5—Combatting harmful tax regimes made between October 2020 and June 2021, although there were fundamental design changes proposed for Pillar • Action 6—Prevention of tax treaty abuse and countering One. It would concentrate on the largest and most profitable treaty shopping global businesses with threshold annual revenues of EUR 20 • Action 13—Country-by-Country Reporting billion and profitability above 10%, applying to all sectors—a significant change from the mooted proposal of a threshold • Action 14—Mutual Agreement Procedures (MAP) of EUR 750 million revenues, focused on digital supplies and According to the OECD3 2021 BEPs progress report: consumer-facing businesses. “The year 2021 marks a full five years since the A key milestone in the process was the agreement at the implementation of the four BEPS minimum standards London G7 Finance Minister meeting in June 2021, where G7 began, and it is clear that the BEPS project has resulted countries adopted a common position on the design of the in tangible progress, irrefutably moving the needle in the International Tax Agreement.5 At the IF meeting on July 1, 2021, direction of a world less susceptible to tax avoidance. the vast majority of countries reached an interim agreement.6 Thanks to the efforts made by all OECD/G20 Inclusive The G20 Finance Ministers recognized this interim agreement Framework countries and countries to comply with the at their July 2021 meeting, setting a clear timeframe by requirements imposed by the BEPS minimum standards, pledging that remaining issues would be resolved ahead of there is more coherence and transparency, and taxation the Rome G20 leaders meeting in late October. is better aligned with substance.” 1 https://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf. 2 https://www.oecd.org/tax/beps/beps-actions/. 3 https://www.oecd.org/tax/beps/oecd-g20-inclusive-framework-on-beps-progress-report-july-2020-september-2021.pdf. 4 https://www.oecd.org/tax/beps/cover-statement-by-the-oecd-g20-inclusive-framework-on-beps-on-the-reports-on-the-blueprints-of-pillar-one-and-pillar-two-october-2020. pdf. 5 https://www.gov.uk/government/publications/g7-finance-ministers-meeting-june-2021-communique/g7-finance-ministers-and-central-bank-governors-communique. 6 The interim agreement represented a broad framework but key aspects were not finalized, such as the percent of taxes to be allocated under Pillar One and the minimum effective tax rate for Pillar Two. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 17 Further discussions by the IF included finalizing key these provisions, potential pockets of jurisdictions may parameters, such as the allocation under Pillar One and the remain, creating incentives for MNEs to shift profits. minimum rate under Pillar Two. On October 8, 2021, 137 Therefore, compliance activities will remain necessary, IF members reached a final agreement, with an ambitious including anti-tax avoidance rules and full implementation implementation timeframe of 2023. Four countries did not of the BEPS Actions, particularly in the context of transfer sign up.7 pricing. The new GMT rules will raise the floor on the CIT rates that POTENTIAL IMPACT OF countries can impose to 15% (there is currently no floor), but T H E I N T E R N AT I O N A L TA X tax competition will not be eliminated. It will remain possible AGREEMENT ON DEVELOPING for countries to compete on rates and to offer compliant tax COUNTRIES incentives, albeit within guardrails. However, there will be implications for tax policy in countries where in-scope MNEs The Two-Pillar Solution will be an important influence on direct currently benefit from rates below 15%, whether through tax policy in developing countries. They are likely to benefit changes in corporate tax rates or through restrictions on from the Pillar One reallocation of taxing rights over businesses certain tax incentives. that have “scale without mass” in the country (i.e., reaching a large market without physical presence in the country). It THE INVESTMENT is difficult to determine at this point how much developing LANDSCAPE countries will gain,8 although the OECD has estimated the reallocation of profits at around EUR 125 billion annually. The The GMT will have profound implications for the use of tax simplified approach to applying the rules of transfer pricing to policy to attract investment. Whether through statutory tax baseline marketing and distribution activities will also benefit rates or such incentives as tax holidays, zero-tax zones, developing countries (the so-called Amount B). Simplifying and tax credits, countries have long used tax policy to attract the handling of marketing and distribution activities will free inbound MNE investment. With the introduction of the GMT, up resources to address more complex and higher risk cases. countries will no longer be able to grant zero or low rates (with an ETR of less than 15%), and incentives such as tax The minimum effective tax rate of 15% under Pillar Two holidays and zero-tax zones will be nullified (in general, any is expected to lead to an increase in global corporate tax tax incentive not linked to real investment—see Section 5). revenues. The OECD has estimated that the minimum effective tax rate will result in the collection of USD 150 billion in new While certain incentives will no longer be GMT compliant, revenues annually.9 The estimate was made at the originally countries will have the scope to introduce Pillar Two compliant envisaged rate of 12.5%, and the OECD has signaled that incentives. These can include unlimited loss carry-forward, revenue gains may be higher at the adopted minimum tax rate accelerated depreciation, and GMT compliant refundable of 15%. tax credits. Countries can look to optimize their tax incentive offering within the parameters of the new regime, recognizing The revenue gains are expected to come from two sources: that it incentivizes real investment; however, it would be prudent for countries to carry out cost-benefit analysis on such 1 Jurisdictions are likely to increase tax rates or introduce tax expenditures to ensure they have a clear policy rationale, the Qualified Domestic Minimum Top-up Tax (QDMTT) are effectively designed to deliver intended policy objectives, to ensure that ed profits in the jurisdiction are taxed and are reviewed periodically. at the minimum rate. If countries fail to act, the parent company’s home jurisdiction will collect the Top-up Tax, Despite the growing global prevalence of tax incentives, or it can be collected as a backstop via the Undertaxed empirical evidence finds they play a limited role in influencing Paymentss Rule (UTPR).10 investor decisions and often lead to fiscal losses, especially 2 MNEs will face reduced incentives to shift profits to in low-income countries already struggling with revenue jurisdictions, leading to increases in tax revenues. Despite mobilization. The World Bank and other development partners, 7 Kenya, Nigeria, Pakistan, and Sri Lanka did not join the agreement. 8 One view holds that the reallocation is likely to be larger in lower income countries than in high income countries as a proportion of current CIT revenues. However, the allocation is based on revenue generated; in absolute terms, it is more likely that the largest reallocation will be to the largest markets by value. 9 https://www.oecd.org/tax/international-community-strikes-a-ground-breaking-tax-deal-for-the-digital-age.htm. 10 The UTPR denies deductions or equivalent adjustment for undertaxed payments. Under the UTPR, the right to tax is based on where tangible assets and employees are located. 18 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION have long advocated that countries consider non-tax factors mandatory but also taking into account the model rules and to strengthen their attractiveness for investment, including the commentary and what they may mean for the tax code more general business environment, investment in infrastructure broadly. and people, and strong public administration. Important questions arise for countries that will impact on THE DESIGN OF PILLAR policy choices for implementation in Box 1. TWO—GLOBAL MINIMUM E F F E C T I V E TA X R AT E Pillar Two is designed to ensure that large MNEs with annual Box 1: Key Implementation questions for revenues greater than EUR 750 million pay a minimum tax of countries 15%. The purpose is to address the ongoing concerns about • Are there entities within the country that are tax avoidance by MNEs and the so-called “race to the bottom” within the scope of GMT rules—i.e., threshold of on corporate tax rates. global annual revenues of EUR 750m? • If there are in-scope entities in the country, The primary rule to achieve implementation is the Income what is the effective tax rate (ETR) applicable to Inclusion Rule (IIR). Under this rule the country in which the those entities (the GMT base and detailed rules parent company of a MNE is taxable will impose a Top-up Tax may be different to the country’s tax code)? on the profits of any foreign subsidiaries that have an effective • Are there US headquartered MNEs within tax rate of less than 15%. the country affected by potential differences between US GILTI and the GMT? Countries are not obliged to apply an IIR, and failure to • Are tax incentives within the country compatible implement it could undermine the impact of the rule and create with the GMT rules? If not, could this impact on an incentive for MNEs to locate the parent entity in countries investment into the country? that have no IIR. Pillar Two addresses this by introducing a backstop rule, the Undertaxed Payments Rule (UTPR). This allocates the Top-up Tax on the profits of lowly taxed entities, There are still critical implementation issues that have including those in the parent country, to the other countries not yet been finalized. In this context, the OECD launched in which the MNE carries on its business activities. The public consultations in March 2022,12 which seek to get views allocation key is based on a combination of tangible assets from stakeholders on the GMT’s implementation. A public and employees in the countries applying the UTPR. hearing took place in April 2022. The consultations sought views with respect to: (i) stakeholders’ desire for further Together, the IIR and UTPR are known as the Global Anti- administrative guidance and what issues should be addressed Base Erosion (GLoBE) Rules11 (the GLoBE Rules are often in the guidance; (ii) filing and information collection, including referred to as the GMT rules in this paper). reporting and record keeping; (iii) suggestions to reduce compliance costs, including safe harbors and simplifications; PROVIDING GUIDANCE AND and (iv) mechanisms to maximize rule co-ordination, increase A S S I S TA N C E TO C O U N T R I E S tax certainty, and avoid the risk of double taxation. I N I M P L E M E N TAT I O N The consultations’ practical output remains to be seen, As is typically the case with international tax reforms, the devil particularly how the process will feed into the next stage of is in the details, and in this context intensive work is continuing technical discussions at the OECD Working Parties (WP11). at OECD working parties to finalize the technical work that will However, one would expect the output with respect to underpin the new global taxation framework. simplifications and safe harbors will be very important for countries with ETRs above 15%. Given the nature of the OECD agreement, it is important for countries to consider the impacts and policy options arising In implementing this complex new international tax from the global agreement. Carrying out an analysis is critical framework, many countries are considering the implications given the nature of the GMT rules—notably, that they are not for their tax codes. This can be particularly challenging for 11 https://www.oecd.org/tax/beps/pillar-two-model-rules-in-a-nutshell.pdf https://www.oecd.org/tax/beps/pillar-two-GLoBE-rules-fact-sheets.pdf. 12 https://www.oecd.org/tax/beps/oecd-invites-public-input-on-the-implementation-framework-of-the-global-minimum-tax.htm. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 19 2 low-capacity countries, particularly in cases where tax experts • Consideration of broader CIT reform. were not actively involved in the discussions at the OECD The annexes to this paper provide guidance for countries on technical Working Parties. identifying MNEs within their jurisdictions, estimating potential revenue gains, and strategies for stakeholder engagement Several policy options will be available to countries in during implementation. implementing the GMT rules. Such options are explored in this paper notably with respect to: This paper will be supplemented by detailed guidance and training materials on the Pillar Two rules, as well as more in- • Protecting the tax base. depth guidance on GMT rules and tax incentives, to support • Implementing the core GMT rules; i.e., the IIR and countries to better understand the complexity of the rules and UTPR. the broader implications for their tax codes. 20 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION 2. >>> Global implementation—state of play C U R R E N T S TAT E O F P L AY The October 2021 OECD agreement set out an implementation date of 2023—“Pillar Two should be brought into law in 2022, to be effective in 2023, with the UTPR coming into effect in 2024.” As set out in the statement, and elaborated above, the core GMT rules comprise: (i) the IIR, which imposes Top-up Taxes on parent entities due to the low-taxed income of constituent entities; and (ii) the UTPR, which denies deductions or requires an equivalent adjustment to the extent the low-taxed income of constituent entities is not subject to tax under an IIR. Significantly, the GMT rules will have the status of a common approach. This means that IF members are not required to adopt the GMT rules; however, if they choose to do so, they will implement and administer the rules in a way consistent with the outcomes provided for under Pillar Two, including model rules and guidance agreed to by the IF, and accept the application of the GMT rules applied by other IF members, including agreement on rule order and the application of any agreed safe harbors. A detailed implementation plan was also approved in the October 2021 agreement, which includes the development of Model Rules, a Commentary to the Model Rules, transition rules, and importantly an Implementation Framework to cover agreed administrative procedures (e.g., detailed filing obligations, multilateral review processes), and safe harbors to facilitate both compliance by MNEs and administration by tax authorities. Significant progress has been made in implementing Pillar Two since the political agreement reached in October 2021. The OECD has finalized the Model Rules and the Commentary, the EU is close to agreeing an EU Directive to implement the GMT rules in the 27 EU Member States. Key countries, including the Republic of Korea and the UK, are advancing their legislative processes. Canada, Malaysia, Mauritius, New Zealand, Switzerland, and the United States have also kicked off the implementation process (see Box 2 below and Annex 2). This remarkable progress must be seen in the context of the extremely ambitious implementation timeframe of 2023, particularly because there was still substantial technical work to be completed at the time the political agreement was reached in October 2021. The OECD has acknowledged that Pillar Two’s discussions in coming months. It is expected that progress in implementation timeframe has effectively moved to 2024 and the EU, a bloc of 27 countries that includes members of the G7 expressed optimism that a breakthrough will occur in the EU and G20, will act as a catalyst for implementation elsewhere. Box 2: Overview of Implementation (as of August 2022) Canada signaled the adoption of the GMT in the 2022 Budget Statement, and it has launched a public consultation on implementation. The EU is currently finalizing a directive to legislate for the GMT rules for implementation in 2024. The proposed Directive has been agreed by 26 of the 27 Member States, with the current EU Presidency working towards getting full agreement in October 2022. EU Member States will be required to incorporate the GMT in national legislation. The Republic of Korea announced the introduction of draft domestic legislation for a GMT in July 2022. Malaysia launched a public consultation on the Pillar Two rules in August 2022. Mauritius published draft legislation in July 2022 (as announced in the 2022/2023 budget speech) to apply a domestic Top-up Tax to ensure that resident companies of MNEs are taxed at a minimum rate of 15%. New Zealand launched a public consultation on GMT implementation in May 2022. Switzerland has committed to implement the GMT in 2024. It has already had public consultations on implementation and launched a consultation on the draft legislation to implement the GMT in August 2022. The UK launched public consultations in early 2022, indicating legislation will be introduced in the Finance Act 2022, coming into effect in 2023. The UK published drafted legislation in July 2022. In the United States, the administration has advocated legislation to align GILTI, the country’s existing minimum tax, with the GMT. In late 2021, the US House of Representatives agreed to legislation to reform GILTI rules to increase the rate to 15% and apply it on a country-by-country basis, but this did not advance in the US Senate. The US agreed to a separate domestic minimum corporate tax of 15% in August 2022 through the Inflation Reduction Act. Work on aligning GILTI and the GMT is continuing at the IF. There is also an open question with respect to the co- global reach of US MNEs, and without prejudicing ongoing existence of the existing US minimum tax regime—the discussions at the OECD, it is necessary to consider the Global Intangible Low-Taxed Income (GILTI)—with the GMT interaction between the current GILTI and GMT rules. This is rules as foreseen in the October 2021 agreement. Given the explored further in Section 4 below. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 23 3. >>> The corporate income tax landscape today Before considering policy considerations and options, it will be useful to review the current corporate income tax landscape because corporate rates and tax incentive policies will be impacted by the new global minimum effective tax rate for MNEs. C O R P O R AT E I N C O M E TA X R AT E S An estimated 23 countries have ETRs below 15%, and 26 countries have economy-wide weighted average ETRs less than 15% (Figure 1) (World Bank Global Marginal Effective Tax Rate (METR) Database Report). Countries with ETRs below 15% have a wide geographical spread, including both developed and developing countries. Several of these countries, including Ireland,1 have already indicated reforms will be made to their tax codes to be compliant with the GMT rules. >>> F I G U R E 1: Countries with statutory CIT rates or average effective tax rates below 15% Source: World Bank Global Marginal Effective Tax Rate (METR) Database 1 Statement by Paschal Donohoe, Minister for Finance (October 2021) https://www.gov.ie/en/speech/615f7-statement-by- minister-donohoe-on-decision-for-ireland-join-oecd-international-tax-agreement/. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 25 COUNTRIES WITH IN-SCOPE In this context, a February 2022 study carried out by ifo INSTITUTE on behalf of the German Federal Ministry of ENTITIES WITH ETRS LESS Finance estimated that 47.7% of low-taxed global profits sit THAN 15% in high-tax countries with an ETR greater than 15% (Table 1). It should be noted that this study uses aggregate country-by- Another factor to consider involves entities within a jurisdiction country reporting (CbCR) data with known limitations.3 that may have an ETR of less than 15%, even though the aggregate ETR for the jurisdiction is greater than 15%. The This study does not indicate the high-tax countries where reason for this may be due to tax incentives, including tax such profits are earned and whether these profits could be holidays, reduced rates including intellectual property (IP) blended 4 under the GMT rules to achieve an ETR of 15%. boxes2, special economic zones, non-qualifying R&D tax However, the identified level of profits is significant, and credits, super deductions for investment expenditure, and so it is likely that even more countries will need to take policy forth (this is explored in greater detail in Section 5). In effect, decisions with respect to GMT implementation, including the result is low-taxed profit within high-tax jurisdictions. reforms to rates and/or tax incentive regimes. >>> T A B L E 1: Undertaxed profits in high tax countries—ifo INSTITUTE, February 20225 EU27 CORPORATIONS ALL CORPORATIONS ALL GROUPS INCLUDING GERMAN CORPORATIONS EXCLUDING GERMAN WITHOUT US US GROUPS BILLION EUROS CORPORATIONS CORPORATIONS ACTIVITY FOREIGN ACTIVITY FOREIGN ACTIVITY FOREIGN ACTIVITY FOREIGN WORLDWIDE ACTIVITY WORLDWIDE ACTIVITY WORLDWIDE ACTIVITY WORLDWIDE ACTIVITY TOTAL PROFITS 229 128 677 440 1.178 859 1.760 1.203 GAINS IN JURISDICTIONS WITH EFFECTIVE 181 80 465 284 775 539 1.149 674 TAX RATE ≥ 15 % OF WHICH TAXED < 15 % 104 37 249 130 382 240 544 293 Note: The values correspond to the averages over the reporting years from 2016 to 2019. TA X I N C E N T I V E S U N D E R T H E of pressure from MNEs bargaining for tax incentives, setting countries against each other. C U R R E N T TA X R U L E S This competition has had a significant negative impact on The 2015 BEPS Actions have helped make progress in revenues, seen in high revenue foregone/tax expenditures for addressing many of the more egregious tax planning developing countries that offer tax incentives and in revenues structures, including stateless entities within MNE groups and in the countries of the ultimate parent entities due to profit using cash boxes in zero-tax jurisdictions. However, the lack of shifting. a global minimum effective tax rate has maintained downward pressure on corporate income tax rates. In addition, there has The US GILTI regime implemented a minimum tax for been extensive tax competition between countries offering US MNEs; significantly, this tax is calculated through global incentives, especially tax holidays, with countries under a lot 2 Intellectual property (IP) box regimes (also referred to as patent boxes) provide lower effective tax rates on income derived from IP. Most commonly, eligible types of IP are patents and software copyrights. Depending on the patent box regime, income derived from IP can include royalties, licensing fees, gains on the sale of IP, sales of goods and services incorporating IP, and patent infringement damage awards. 3 For a discussion of known limitations of the CbCR data, see https://www.oecd.org/tax/tax-policy/anonymised-and-aggregated-cbcr-statistics-disclaimer.pdf. 4 It is conceivable under the GMT rules that an entity within a country is subject to low tax rates, but other entities have rates above 15%, ensuring that the MNE’s profits in that country have an ETR of 15% or above. 5 Clemens Fuest, Felix Hugger und Florian Neumeier, ifo INSTITUTE; Grenzüberschreitende Geschäftsbeziehungen innerhalb von Unternehmensgruppen – Ausmaß und Reformoptionen Studie im Auftrag des Bundesministeriums der Finanzen vorgelegt von: fo Forschungsgruppe Steuer-und Finanzpolitik. See Table 48, Pg. 160 https:// www.ifo.de/en/publikationen/2022/monograph-authorship/grenzuberschreitende-geschaftsbeziehungen. 26 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION blending. US MNEs could conceivably benefit from low taxes, including tax incentives, and blend these profits with higher taxes elsewhere without facing Top-up Tax in the US.6 >>> T A B L E 2: Overview of tax incentives regimes across regions TAX REDUCED INVESTMENT SUPER REGION R&D SPECIAL ZONES HOLIDAY RATE LINKED DEDUCTIONS EAST ASIA & PACIFIC 15 2 21 5 9 2 EASTERN EUROPE & CENTRAL ASIA 12 0 30 3 12 4 LATIN AMERICA & CARIBBEAN 15 4 24 4 5 6 MIDDLE EAST & NORTH AFRICA 8 3 15 0 3 0 SOUTH ASIA 1 1 4 0 1 0 SUB-SAHARAN AFRICA 15 6 26 4 9 3 NORTH AMERICA 2 0 2 0 2 0 WESTERN EUROPE 7 1 22 8 13 1 TOTAL-> 75 17 144 24 54 16 Source: WB Incentives Global Database Table 2 presents a global overview of tax incentives, which zones in many countries in most cases include an exemption indicates investment-linked incentives the most widely used, from all income taxes. followed by tax holidays and R&D incentives. The tax-free The compatibility of these incentives with GMT rules is explored further in Section 5. 6 The GMT rules will use jurisdictional rather than global blending. The US administration is advocating for a jurisdictional blending approach in reforms to the GILTI to align with the GMT rules. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 27 4. >>> Policy considerations for developing countries OVERVIEW The October 2021 agreement raised questions with respect to implementation. Not all of them have been answered. Uncertainties remain for countries preparing to make policy decisions on implementation—the primary reason is the OECD is continuing to work on the Implementation Framework. While recognizing the process is ongoing, it is already clear that many countries will need to consider reforms to their corporate tax regimes because they could otherwise face scenarios where profits earned in their jurisdictions could be subject to additional taxes in the jurisdiction of the parent company under the IIR or in other jurisdictions under the UTPR. This is particularly pertinent for developing countries, which are weighing decisions on implementing complex rules in an unsettled and uncertain environment where doubts remain with respect to implementation in developed countries and where the Implementation Framework is not yet agreed. A further uncertainty is that by design, the GMT follows a common approach; i.e., the GMT is non-mandatory, and the architecture of the rules does not require all countries to implement the rules. While appreciating that there are many moving parts to the GMT rules and that important aspects of the Implementation Framework are under development, it is timely for countries to reflect on the relevant policy considerations in contemplating implementation options that will be guided by a country’s own circumstances. These policy considerations inform the subsequent sections on tax incentives, policy options, and implementation recommendations. This section explores some of these policy considerations: • The nature of GMT rules. • Broad policy considerations for implementing GMT rules. • The consequences for a country that does not implement the core GMT rules. • Other implementation considerations—the threshold decision and company migration. • Interaction between the GMT rules and US GILTI. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 29 T H E N AT U R E O F T H E G M T The October 2021 agreement recognized the complexity of the GMT rules, and there is a commitment to examine RULES simplification, positive listings, and safe harbors. This process It is useful to recall that the GMT rules consist of two interlocking is still ongoing and is expected to be finalized by end 2022. domestic rules: Therefore, it may be premature for countries that have in- scope subsidiaries of MNEs with ETRs above 15% to make i) An Income Inclusion Rule (IIR), which imposes Top-up definitive policy decisions on practical implementation, Tax on a parent entity with respect to the income of a pending the outcome of these discussions. constituent entity; and Another issue for consideration is the taxes covered by the ii) An Undertaxed Payment Rule (UTPR), which denies GMT rules. In some emerging economies and developing deductions or requires an equivalent adjustment to the countries, certain sectors are levied turnover taxes in lieu of extent the income of a constituent entity is not subject to income taxes (mainly for simplicity). Those turnover taxes do tax under an IIR not qualify as “covered taxes” under Pillar 2, and the MNE The nature of these rules will have important implications may be levied a Top-up Tax. for countries with respect to implementation and broader corporate tax policy. There will be options available to It should be recognized that a global, country-level minimum countries on how they implement the GMT; in many cases, tax system is a significant undertaking that was never going these options will depend on the individual circumstances as to be simple. Implementation requires coordinated actions by well as the ongoing work at the OECD on evaluation of country countries through common rules. The new tax base and the implementation and safe harbors. way the covered taxes need to be calculated create additional complexity, which will be challenging for countries and MNEs BROAD POLICY alike, particularly in low-capacity countries. C O N S I D E R AT I O N S F O R THE CONSEQUENCES FOR A IMPLEMENTING THE CORE C O U N T RY T H AT D O E S N O T GMT RULES IMPLEMENT THE CORE GMT Under the IIR, the country in which the parent company of RULES a MNE is taxable will impose a Top-up Tax on the profits of any foreign subsidiaries that have effective tax rates of less A question that will arise for countries is the consequences than 15%. If a country is the parent country of in-scope MNEs, (if any) of not implementing the core GMT rules—i.e., the IIR there is a strong rationale to implement the IIR and benefit and UTPR. As previously discussed, the agreement does not from any undertaxed profits in subsidiaries. make implementation of the IIR and the UTPR mandatory, but IF countries agree to respect the rules applied in other An important consideration for countries is the complexity countries. of the IIR and the resources required to implement it. In this context, several countries, including in the EU, have As with other issues, the work on safe harbors will provide highlighted that their effective tax rate was already above 15% greater clarity to countries, especially those who have ETRs and they had few or no Ultimate Parent Entities of MNEs in above 15% and who apply the QDMTT. their country. The cost and complexity of implementing an IIR Possible scenarios are indicated below: was disproportionate to the benefits. SCENARIO POTENTIAL CONSEQUENCE NO IN-SCOPE MNES Will depend on the outcome of the ongoing work on safe harbors. UPE OF IN-SCOPE ENTITIES Dependent on ETR. Could result in UTPR being applied by other countries if profits under taxed. Reputational damage. IN-SCOPE SUBSIDIARIES OF MNES WITH ETR15% Will depend on the outcome of the ongoing work on safe harbors. Failure to implement will likely result in profits being taxed in other jurisdictions, unless the IN-SCOPE SUBSIDIARIES OF MNES WITH ETR <15% QDMTT is introduced. If ETR is achieved due to tax incentives, such incentives may be nullified. Potential reputational damage. 30 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION O T H E R I M P L E M E N TAT I O N 2017, as part of a wider reform of its corporate tax code in the Tax Cuts and Jobs Act (TCJA), the US introduced a 10.5% C O N S I D E R AT I O N S —T H E minimum tax on Global Intangible Low-Taxed income (GILTI) THRESHOLD DECISION AND to discourage profit shifting. The rules allow 80% credit for C O M PA N Y M I G R AT I O N foreign taxes paid, making the effective GILTI rate 13.125%. If the foreign tax rate is 13.125% or higher, there will be no US GMT rules will apply to MNEs that meet the EUR 750 million tax after the 80% credit for foreign taxes. Under the TCJA, the threshold, but countries are free to apply the IIR to MNEs GILTI rate is scheduled to increase to 13.125% in 2026 (an headquartered in their country that do not meet the threshold. effective 16.4% with the 80% credit). The IIR allows the country in which a group’s parent company is resident to apply a Top-up Tax to the profits of foreign Unlike the GMT, the GILTI is calculated on a global blending subsidiaries subject to a low effective rate of tax. The rule basis, which means that profits taxed at 5% in one jurisdiction is similar in purpose to controlled foreign company (CFC) can be balanced out by profits taxed at 30% in another regimes, but CFC rules tend to be more complex and the IIR jurisdiction. The GMT rules are calculated on the basis only applies to larger MNEs (turnover more than EUR 750 of jurisdictional blending—it is not possible to blend rates million). In addition, nothing prevents countries from choosing between countries under the GMT. a lower threshold when applying the IIR to include domestic groups that are large in the context of the local economy. That The current US administration brought renewed energy to would make it possible to charge Top-up Tax on the profits of the discussions at the IF and was instrumental to the October these smaller groups’ foreign subsidiaries. 2021 multilateral agreement. However, the US did not commit to implementing the GMT Model Rules; rather, the agreement If countries chose to apply the IIR to smaller groups, they recognizes the co-existence of the US GILTI regime with GMT would need to address the risk the policy might lead to company rules: migrations. To avoid the IIR, a group could move its parent to a country that does not apply the IIR. For larger groups within GILTI co-existence the scope of the GMT rules, the parent’s migration will not be effective because the backup UTPR will then apply. That is not It is agreed that Pillar Two will apply a minimum rate on a so for smaller groups. However, provisions can be put in place jurisdictional basis. In that context, consideration will be domestically to deter this kind of tax-motivated migration. If given to the conditions under which the US GILTI regime a country wants to apply the IIR to smaller groups, it might will co-exist with the GLoBE Rules, to ensure a level want to introduce such rules, although it should recognize playing field. the technical complexity of the rules and the resulting administrative and compliance burdens. Countries will also The US administration committed to reforming the GILTI need to consider whether applying a lower threshold could rules to align more closely with the GMT in the context of a potentially deter new investment, which may not necessarily comprehensive reform package introduced in Congress as be tax driven but rather a response to additional compliance the “the Build Back Better Act.” In late 2021, the House of burdens that would not apply in another country. Representatives agreed to legislation reforming GILTI with an effective rate of 15% and jurisdictional blending. However, this Countries will also need to reflect on whether the parent legislation has not yet progressed in the Senate. In August country of an in-scope MNE is applying a lower threshold. This 2022, the US agreed to a minimum corporate tax ensuring that may impact the application of a domestic minimum tax within large US businesses pay a minimum rate of 15%. The tax is the country and will be important in drafting tax legislation to similar in concept to the QDMTT but with design differences.1 ensure that undertaxed profits are not inadvertently taxed by the country of the ultimate parent. The US administration signaled a clear intention to implement the International Tax Agreement, but approval INTERACTION BETWEEN THE of the reforms is required by the legislature. The interaction between the current US GILTI and the GMT rules may need G M T R U L E S A N D U S G I LT I to be considered, recognizing that the work on GILTI co- existence is still ongoing at the OECD. Another policy consideration that may impact implementation is the interaction between GMT rules and US GILTI rules. In 1 The US minimum corporate tax and the QDMTT share the broad objective of terms of ensuring a 15% effective rate is paid. However, important differences in the rules have been highlighted; see https://taxfoundation.org/inflation-reduction-act-minimum-tax/. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 31 5. >>> Ensuring that tax incentives are GMT compliant Evaluating the compatibility of tax incentives will be an important step for countries on the implementation roadmap. The GMT rules do not lead to harmonized tax rates; rather, they set a floor on tax competition, which will reduce incentives for profit shifting to achieve low or zero taxes. Although the GMT will not eliminate tax competition, it will facilitate investment in substance and provide for qualifying tax incentives. A key feature of the GMT is that the minimum rate of 15% is an effective rate. This effective rate will be calculated on a country-blending basis using recognized accounting standards and using prescribed methodologies for calculating taxable income in accordance with the Model Rules. I M P L I C AT I O N S F O R E X I S T I N G TA X I N C E N T I V E REGIMES GMT rules will have implications for the design of incentives within tax codes, and countries face the risk that certain incentives will not be GMT compliant. Tax holidays, very low concessional rates, and zero-rate free-trade zones are expected to be caught by the GMT rules. If so, the incentive’s benefit to the investor is substantially negated: The tax investors save simply becomes payable elsewhere. The practical effect of a non-qualifying domestic incentive is to transfer part of a country’s tax base to other countries. Countries should carry out an evaluation of their incentives regimes to consider whether they are GMT compliant and remain consistent with the policy objectives of encouraging substance and investment. A key consideration is how to transition from old rules to the new GMT-compliant ones. This will first require a clear analysis of existing tax incentives’ compatibility with GMT rules, followed by a managed reform process to align non-compliant incentives with GMT rules. A policy choice that may need consideration is whether to have a uniform tax incentive structure for all businesses operating in the country or to have specific rules applying to Pillar Two in-scope MNEs. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 33 S U B S TA N C E - B A S E D I N C O M E Q U A L I F Y I N G TA X C R E D I T E XC L U S I O N ( S U B S TA N C E REGIMES CARVE-OUT) A notable aspect of the GMT rules is their recognition of The GMT rules include a formulaic carve-out (deduction) to 1 certain tax credits, such as research and development credits. approximate the level of substance an MNE has in a country However, the rules put parameters around what constitutes based on payroll and tangible assets. This carve-out, designed a qualified tax credit and the conditions for such incentives. to give some benefit to real investment, was a key aspect of These will be important considerations for countries that the political agreement. currently offer such credits or are considering offering them. The rules introduce an important distinction between the The carve-out will exclude an amount of income equal to treatment of refundable and non-refundable tax credits—the 5% of the carrying value of tangible assets and payroll. In a former being considered as income and thus more beneficial transition period of 10 years, the amount of income excluded with respect to the impact on the ETR and the latter being will be 8% of the carrying value of tangible assets and 10% of considered a direct tax credit and thus benefits may be payroll, declining annually by 0.2 percentage point for the first negated if the incentive reduces the ETR below 15%. five years and by 0.4 percentage point for tangible assets and by 0.8 percentage point for payroll for the last five years. Depending on the impact on ETRs, this may mean that a country may need to reconfigure their current credit regime to The payroll costs that qualify for the carve-out include: ensure compatibility, preserve the benefit, and perhaps most important ensure the credit meets its policy objective. • Wage and salary costs. Annex 4 sets out some examples to highlight the importance • Employee benefits that provide a direct personal benefit of the design of tax credit incentives with respect to consistency to the employee (like health insurance and pension with the GMT rules. contributions). • Payroll taxes and social security contributions borne by C O M PAT I B I L I T Y O F TA X the employer. INCENTIVES WITH THE The tangible assets carve-out: G LO B A L M I N I M U M TA X • Is based on the average carrying value (net of The compatibility of tax incentives with GMT rules has been accumulated depreciation) in the financial statements of one of the key discussion points since the agreement was assets located in the jurisdiction. reached in October 2021 and the Model Rules were finalized. Using a traffic light system, the Tax Foundation2 examined • Tangible assets that qualify include property, plant and various incentives’ compatibility with the GMT rules. The equipment, natural resources as well as licenses for UN Conference on Trade and Development took a similar the use of immovable property or exploitation of natural approach in an analysis of Pillar Two’s implications for tax resources. incentives in its June 2022 World Investment Report 2022,3 It is expected that incentives related directly to costs incurred, which relied on a working paper prepared by WU Vienna such as full deductibility and accelerated depreciation, should University of Economics and Business-Institute for Austrian qualify toward the carve-out calculation. However, enhanced and International Tax Law.4 or super deductions (e.g., a 130% deduction for an investment expenditure) should not qualify because they grant a favorable Work is ongoing at the World Bank on the interaction of permanent book tax difference; therefore, they may require a tax incentives in the new minimum tax rate environment. The Top-up Tax, even in high-tax jurisdictions initial analysis (below) arrives at conclusions about various tax incentives’ compatibility with GMT rules. These conclusions are similar to those of the Tax Foundation, UNCTAD, and WU 1 Annex 3 provides an illustration of the methodology for calculating the GMT, including with respect to the substance-based income exclusion. 2 https://taxfoundation.org/oecd-global-minimum-tax-rules/ (Daniel Bunn, December 2021). 3 World Investment Report 2022; UNCTAD; June 2022; https://unctad.org/webflyer/world-investment-report-2022. 4 The Treatment of Tax Incentives under Pillar Two; WU Vienna University of Economics and Business-Institute for Austrian and International Tax Law; June 2022; https:// papers.ssrn.com/sol3/papers.cfm?abstract_id=4132515. 34 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION Vienna University of Economics and Business-Institute for expenditures to ensure they have a clear policy rationale, are Austrian and International Tax Law. The World Bank includes effectively designed to deliver the intended policy objective, the proviso that much will depend on individual country-level and are reviewed periodically. circumstances in deciding whether a particular tax incentive can be compatible under the GMT. MANAGING THE TRANSITION F O R TA X I N C E N T I V E S >>> T A B L E 3: Tax incentives and the GMT The transition to GMT rules will present challenges. This will need careful management because MNEs may have legitimate expectations linked to specific commitments, and INCOMPATIBLE WITH THE GMT5 consultations with the taxpayers involved will be important. • Tax holiday arrangements • Zero corporate tax Managing the transition on tax incentives will also be • Effective tax rates below 15% in the absence of the important, particularly where it is envisaged that a particular QDMTT incentive will not be compatible with the GMT rules or may • Tax-free zones need to be reformed. Consultations with taxpayers9 will be MAY BE COMPATIBLE BUT WILL DEPEND ON CIRCUMSTANCES6 important in terms of managing expectation, forward planning, • Reduced-rate incentives (Patent, IP boxes) and input on design. • Non-GMT compliant tax incentives on refundable tax credits7 One of the biggest challenges will be for jurisdictions • Cash incentives (will be considered as grant income who have offered tax holidays to MNEs, on a statutory or for IIR purposes) concessional basis. The GMT rules will effectively nullify the SHOULD BE COMPATIBLE WITH THE GMT benefits of the tax holidays. In the absence of a QDMTT to achieve an ETR of 15%, there will be a Top-up Tax by other • Tax incentives targeted at pure domestic companies (not part of an MNE group) jurisdictions. • Preferential rates above 15% for start-up businesses Tax holiday arrangements may include conditionality, such • Unlimited loss carry-forward as MNE commitments on the number of employees, capital • Accelerated depreciation investment over a period of years, or direct investments in • GMT-compliant Refundable Tax Credits8 infrastructure (e.g., access roads, servicing sites, education programs). Countries can review tax incentives with this guidance in mind. However, individual country circumstances will influence Potential policy options are: compatibility—not the least of which is how an incentive will impact the ETR. For example, a tax incentive that reduces 1 Apply a Qualified Domestic Minimum Top-up Tax (ETR rates may lead to a 20% effective rate in one country with a 15%) to such MNEs, rather than bring them within the headline rate of 30%, but the same tax incentive in another scope of the headline tax rate. jurisdiction could result in a ETR below 15%. In the absence 2 Apply the statutory rate to the taxpayer but create a fund of a domestic Top-up Tax, it could lead to Top-up Taxes in to invest in infrastructure, capacity building, or education another country under the IIR. to benefit the MNE and society more broadly. It is also important to stress that countries should consider 3 Combination of both options; i.e., apply the top-up and that some incentives will be GMT compatible, but it would create an investment fund. be prudent to carry out cost-benefit analysis of such tax 5 These are unlikely to be compatible unless there is a possibility to blend rates at a jurisdictional level or such incentives may be targeting out-of-scope entities (e.g., smaller businesses below the threshold or purely domestic businesses). 6 Individual country circumstances will be particularly relevant for this category of incentives with respect to compatibility. 7 A Qualified Refundable Tax Credit will be treated as income under GMT rules, while a Non-Qualified Refundable Tax Credit will be treated as a reduction in tax. The latter will be potentially subject to a Top-up Tax that will nullify the impact of the tax credit. 8 Qualified refundable tax credits could reduce ETRs below 15% and therefore would need to be assessed. Annex 4 includes examples of the implications of tax credits’ design under GMT rules. 9 For instance, Ireland recently commenced a consultation with stakeholders on the design of the R&D credit and knowledge development box regimes, which specifically highlighted the potential impact of the GMT rules and the Subject-to-Tax Rule (STTR). https://www.gov.ie/en/consultation/d12cb-public-consultation-on-the-research-de- velopment-tax-credit-and-the-knowledge-development-box-april-2022/. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 35 6. >>> Policy options for implementation of the Global Minimum Tax and broader corporate tax reforms GUIDANCE ON POLICY OPTIONS The global minimum effective tax rate for MNEs is a fundamental change to the international tax framework, and many jurisdictions will need to make reforms, whether to protect the tax base, implement the core GMT rules, or carry out a deeper reform process. Countries have implementation options. What options they take will depend on their own circumstances including policy choices and ongoing work at the IF to finalize the Implementation Framework. An underlying GMT principle is that the minimum rate of 15% is an effective rate that will be calculated on a jurisdictional blended basis1 using recognized accounting standards and methodologies for calculating taxable income in accordance with the OECD Model Rules. In addition, an expected peer review process will evaluate conformity of individual country laws with the Model Rules to certify them as “qualified.” An open question is whether countries outside the IF can take measures to ensure compatibility with GMT rules. Given that Pillar Two is a common approach, the expectation is that countries will have a choice of policy options to implement GMT rules and/or ensure compatibility with the rules. This will be particularly relevant for countries with an ETR for in-scope entities of MNEs within the country below 15% (using the GMT base). It will also be important where countries have UPEs (in respect to implementing the IIR) and where countries may have subsidiaries of MNEs (the UTPR). The policy options for implementing the GMT include (some are complementary): • Adopting the core GMT Rules—the IIR and UTPR. • Introducing a domestic Top-up Tax (QDMTT) to achieve the 15% minimum tax within the country. 1 It is the ETR of the MNE (not each entity) within the jurisdiction. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 37 • Implementing a statutory corporate tax rate above the The IF discussions with respect to safe harbors may minimum of 15%2 that could be applied to both in- and also be relevant because they could provide administrative out-of-scope businesses. This could include an option simplifications for MNEs. to rationalize and simplify the corporate tax code with a rate above the global minimum but applying to a broader POLICY OPTIONS base of businesses. In considering potential policy options, it is useful to group • Withdrawing/adjusting tax holiday arrangements that them into four scenarios, recognizing that implementation are not compliant with GMT rules. will depend on the circumstances within a country and that • Amending other tax code provisions to ensure they are implementation of core GMT rules is not mandatory. GMT compliant; e.g., R&D tax credits. A framework for considering these options is indicated • Introducing GMT-compliant incentives to encourage below: investment. STATUS LEVEL 1 LEVEL 2 LEVEL 3 QUO PROTECTING THE TAX BASE IMPLEMENTING THE CORE GMT RULES CONSIDER BROADER CIT REFORM Do Introduce a Evaluate and Implement IIR Implement UPTR Broader CIT Optimize tax nothing QDMTT reform tax *UTPR comes rate reform incentive to the GMT incentive into effect one rules regime year after IIR OPTION 1: DO NOTHING LEVEL 1 MEASURES— GMT rules and the common approach mean a country does P R OT E C T I N G T H E TA X B A S E not need to implement the Model Rules. While the “do nothing” option is on paper feasible under the agreement, it is not A specific feature of the GMT rules is that undertaxed profits without risks, particularly with respect to a country foregoing can be topped up in other countries. It is recommended that tax revenues by leaving room for another country to impose a countries take actions to ensure that they do not lose tax Top-up Tax. Of course, this will depend on whether a country revenues to other countries—thus the need to protect its tax has in-scope MNEs, either UPEs or subsidiaries, and whether base. The options identified are (i) to introduce a Qualified these entities have ETRs less than 15%. Whether this option Domestic Minimum Top-up Tax (QDMTT), which is an is feasible in practice may depend on the safe harbor rules important part of the architecture of the GMT rules, and (ii) to currently being developed by the IF. evaluate and reform (as necessary) tax incentive offering to ensure they are GMT compatible and can continue to meet An additional risk to this approach is that countries that policy objectives. It is also relevant that these options can help do not implement any reforms could be vulnerable to being raise revenues, particularly for countries where MNEs are included on negative lists,3 which could harm investment taxed below 15%. opportunities and may lead to reputational risks. 2 GMT rules, including the substance-based income exclusion, means that the statutory CIT rate, even if above 15%, may not result in a GMT ETR of 15%. Thus a QDMTT may be relevant for many countries. 3 For example, the EU Code of Conduct has a listing process for non-cooperative countries. In December 2021, EU Finance Ministers invited the EU Code of Conduct Group to take the work of the Group forward “by further exploring how to enhance the EU listing process based on progress at the international level” https://data.consili- um.europa.eu/doc/document/ST-14814-2021-INIT/en/pdf. 38 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION OPTION 2: INTRODUCE A QUALIFIED Model Rules through the QDMTT (see Box 3 for the definition D O M E S T I C M I N I M U M TO P - U P TA X and Chapter 5 of the Model Rules4 for more details). GMT rules contemplate the possibility that jurisdictions will The QDMTT applies a domestic Top-up Tax to profits arising introduce their own Qualified Domestic Minimum Top-up Tax locally that would otherwise be subject to a tax rate of less (QDMTT) based on GMT mechanics. The tax is fully creditable than 15%. This could be a case where the headline tax rate against any liability under the GMT, preserving a jurisdiction’s is below 15% or where an entity benefits from an effective tax primary right of taxation over its own income. This alternative rate below 15% arising from certain tax incentives that may to achieving the objective of a 15% ETR is provided for in the not be GMT compatible. Box 3: Definition of a QDMTT under the OECD Model Rules Qualified Domestic Minimum Top-up Tax means a minimum tax that is included in the domestic law of a country and that: (a) determines the Excess Profits of the Constituent Entities located in the country (domestic Excess Profits) in a manner that is equivalent to the GLoBE Rules; (b) operates to increase domestic tax liability with respect to domestic Excess Profits to the Minimum Rate for the country and Constituent Entities for a Fiscal Year; and (c) is implemented and administered in a way that is consistent with the outcomes provided for under the GLoBE Rules and the Commentary, provided that such country does not provide any benefits that are related to such rules. A Qualified Domestic Minimum Top-up Tax may compute domestic Excess Profits based on an Acceptable Financial Accounting Standard permitted by the Authorized Accounting Body or an Authorized Financial Accounting Standard adjusted to prevent any Material Competitive Distortions, rather than the financial accounting standard used in the Consolidated Financial Statements. Several countries have already signaled that they are O P T I O N 3 : E VA L U AT E A N D R E F O R M considering the introduction of a QDMTT as a means of TA X I N C E N T I V E S TO B E I N L I N E ensuring that an effective rate of 15%5 is achieved. Such W I T H T H E G LO B A L M I N I M U M TA X a policy option is expected to be a key feature of country As discussed in Section 5, GMT rules are likely to have implementation; otherwise, there is potential for losing tax implications for the viability of certain tax incentives, making it revenues to other countries. prudent for countries to evaluate their incentives regimes. This is particularly relevant in cases where the tax provision (or QDMTT design will be very complex because it will need indeed a combination of reliefs) could lead to an ETR of less to very closely follow the rules for constructing income and than 15%, which could result in a Top-up Tax being applied in covered taxes under GMT rules to be effective at closing any other countries under the IIR or UTPR or could be nullified by top-up opportunities. There is likely to be a process, through a qualifying domestic Top-up Tax. the IF and specifically OECD Working Party 11 (on Aggressive Tax Planning), to determine whether a domestic Top-up Tax is Although such an evaluation will depend on country-specific qualified under the Model Rules. The intention is to provide circumstances, Table 4 illustrates scenarios (non-exhaustive) certainty to IF members and MNEs. and suggests potential reform measures a country may wish to consider: 4 https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.pdf. 5 Mauritius has proposed draft legislation to apply the QDMTT https://budgetmof.govmu.org/documents/2022_23budgetspeech_english.pdf . The UK, Ireland, and Canada have signaled they are considering QDMTTs: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1045663/11Jan_2022_ Pillar_2_Consultation_.pdf; https://www.gov.ie/en/consultation/c68e4-public-consultation-on-pillar-two-minimum-tax-rate-implementation/ Tax Measures: Supplemen- tary Information | Budget 2022. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 39 >>> T A B L E 4: Tax incentives compatibility with the GMT INCENTIVE COMPATIBILITY WITH GMT RULES POTENTIAL REFORM OPTIONS Withdraw tax holidays with appropriate A tax holiday for an in-scope MNE may result in an transitional arrangements. Tax holidays ETR of 0% and therefore is not compatible with the Consultations with stakeholders is strongly GMT rules. recommended, particularly where tax holidays have a statutory basis (e.g., fiscal stability pacts). Depending on the rate applied, a reduced CIT rate, such as IP box regimes, may not be compatible with Withdraw the reduced rate, including as part of GMT rules or will be diluted by the rules. An added broader tax reform. Reduced rates consideration with reduced rates is the Subject to Increase the CIT rate to ensure the ETR for in-scope Tax Rule in Pillar Two, which can apply where rates MNEs is at or above 15%. are less than 9%. Tax-free zones are not likely to be compatible with Withdraw CIT free tax zones with appropriate Tax-free zones GMT rules as far as corporate taxes are concerned. transitional arrangements. Consider reforming non-refundable tax credits to A tax credit’s design will determine its treatment ensure they are refundable and compliant with GMT under GMT rules. For instance, a refundable tax Tax credits6 rules. including R&D tax credit (under certain conditions) will benefit from a Revisit the value of the credit to ensure it is does credits and other more favorable treatment than a non-refundable not reduce the ETR below 15% and lead to Top-up tax credits7 tax credit. Rules consider the former as “income,” Taxation in another country. A QDMTT can provide while the latter is considered a tax credit and will a backstop to ensure that any Top-up Tax is not reduce the ETR, and the benefit may be nullified. taxed elsewhere under the IIR. LEVEL 2 MEASURES— businesses within a jurisdiction that would seek to expand operations in other countries. IMPLEMENT THE CORE G LO B A L M I N I M U M TA X R U L E S It should be noted that there will be a process at the IF with respect to certification of qualifying rules, including the IIR, to Level 2 measures involve implementation of the core GMT ensure that they are consistent with the Model Rules. rules—the Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR). The policy impetus for introducing these rules will depend on country-specific circumstances, particularly the MNEs’ profile in the country, and the applicable OPTION 5: INTRODUCE THE ETR, taking into account implementation of Level 1 measures. U N D E R TA X E D PAY M E N T S R U L E Countries are not obliged to apply an IIR, and failure to implement could undermine the impact of the rule and create OPTION 4: INTRODUCE THE INCOME incentives for MNEs to locate their parent entities in countries INCLUSION RULE that have no IIR. GMT rules addresses this with a backstop rule, the Undertaxed Payments Rule (UTPR). The primary core GMT rule is the Income Inclusion Rule (IIR). This rule imposes a Top-up Tax on a parent entity with respect The UTPR is a highly complex rule that allocates the Top-up to the income of a constituent entity. Tax on the profits of lowly taxed MNEs, including those in the parent country, to the other countries in which the MNE carries Whether a country implements the IIR will primarily depend on business activities. The allocation key for these profits is on whether it has UPEs of MNEs within its jurisdiction. If a based on a combination of tangible assets and employees in country does not have UPEs, there should not be an immediate countries applying the UTPR. requirement to implement the IIR. Conversely, there is a strong case for countries with UPEs of MNEs to implement the The UTPR may be particularly relevant where countries IIR. The IIR may become relevant if there are large domestic have in-scope entities of MNEs and the country/countries of 6 The impact of the compatibility of refundable and non-refundable tax credits will depend on country-specific circumstances and specifically how they impact on ETRs; i.e., do they reduce the ETR below 15%. Annex 5 provides examples of the impact of different credits. 7 Broader tax credits include credits for creative industries (e.g., film, TV, and gaming). 40 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION the UPE of MNEs do not implement the IRR. As highlighted Offering this rate to all businesses could avoid a two-tier above, countries can protect their tax base with a QDMTT. policy with large MNEs benefiting from preferential rates while out-of-scope business face higher CIT rates. An important consideration is that the UTPR will not come into effect until one year after the IIR. The UTPR also has an This policy option could be combined with simplification exclusion for MNEs in the initial phase of their international of the tax code and base broadening. It has the potential activity.8 The delayed implementation is helpful given resource to lead to an overall increase in tax revenues and increase constraints, and a decision to implement the UTPR can be attractiveness for investment, although this will depend on deferred while taking into consideration global implementation circumstances within individual countries. of the IIR and the QDMTT.9 LEVEL 3 MEASURES— O P T I O N 7 : O P T I M I Z E TA X C O N S I D E R AT I O N O F INCENTIVE OFFERING IN LINE WITH B R O A D E R C O R P O R AT E T H E G LO B A L M I N I M U M TA X R U L E S I N C O M E TA X R E F O R M S Option 3 advocates that countries should review and reform tax incentives regimes to be compatible with the GMT rules. The global minimum tax is a significant development in This is an important step in protecting the tax base and international tax. The core GMT rules, the IIR and the UTPR, avoiding low taxation of MNEs and the resulting Top-up Taxes are complex, and it may not be necessary for all countries by other countries under the IIR or UTPR. to implement these. However, this new international tax framework may provide opportunities for countries to reshape As another option, countries may wish to consider new their CIT regimes, whether through broadening the tax base incentives that are compatible with the GMT rules, including or considering tax rate reforms that may include revisiting their incentives identified in Section 5. The proviso applies that current tax incentives to attract investment. countries should ensure that tax incentives are tied to a clear policy rationale, effectively designed to deliver the policy objective, measurable, and reviewed periodically. OPTION 6: CONSIDER BROADER CIT R E F O R M I N C L U D I N G R AT E P O L I C Y I M P L E M E N TAT I O N O F T H E An option for countries is to review their overall corporate G LO B A L M I N I M U M TA X — income tax regime to ensure it is optimized for the new Pillar D E C I S I O N M AT R I X F O R Two environment. Tax incentives that typically benefit MNEs, DEVELOPING COUNTRIES such as tax-free zones and tax holidays, will not be compatible in this new environment if they result in ETRs of less than 15%. The decision matrix below provides further guidance to countries with respect to the Implementation Framework Very generous tax incentives stood side by side with high depending on certain scenarios (Table 5). corporate taxes applying to domestic businesses. The removal of incentives under GMT rules may provide an opportunity for It is not intended to be definitive or cover all situations countries to offer lower CIT rates that apply to all businesses because the GMT has many moving parts. Rather, it provides within a country. Such rates would need to deliver an ETR of food for thought for the decision-making process. If broader at least 15%, although countries could decide to implement CIT reforms are to be considered, it will be necessary for a QDMTT as a backstop to avoid the possibility of a Top-up countries to carry out the required economic analysis and Tax being applied elsewhere. This option may be preferred consult with key stakeholders. depending on the outcome of the safe harbor discussions. 8 GMT rules provide for a UTPR exclusion for MNEs in the initial phase of their international activity, defined as those MNEs with a maximum of EUR 50 million in tangible assets abroad and operations in no more than five other jurisdictions. 9 If the UPE countries of MNEs implement the IIR, and other countries implement the QDMTT, the UTPR should not need to be activated. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 41 >>> T A B L E 5. Implementation of the Global Minimum Tax—decision matrix for developing countries STATUS QUO LEVEL 1 LEVEL 2 LEVEL 3 PROTECTING THE IMPLEMENTING THE CONSIDER BROADER TAX BASE CORE GMT RULES CIT REFORM DO NOTHING INTRODUCE EVALUATE IMPLEMENT IMPLEMENT BROADER OPTIMIZE TAX SCENARIOS A QDMTT AND IIR UPTR CIT RATE INCENTIVES REFORM REFORM TO THE GMT *UTPR COMES TAX RULES INTO EFFECT INCENTIVE ONE YEAR REGIME AFTER IIR COUNTRY HAS NO-IN- SCOPE MNES (FOREIGN ? ? ? ? ? ✓ ✓ OR DOMESTIC) COUNTRY IS THE UPE OF IN-SCOPE MNES x ✓ ✓ ✓✓ ✓ ✓ ✓ COUNTRY HAS SUBSIDIARIES OF ? ✓ ✓ ? ? ✓ ✓ IN-SCOPE MNES COUNTRY HAS ENTITIES OF IN-SCOPE MNES x ✓✓ ✓✓ ? ? ✓ ✓ WITH AN ETR OF <15% COUNTRY HAS LARGE DOMESTIC BUSINESSES x ✓ ✓ ? ? ✓ ✓ COUNTRY IS SEEKING TO ATTRACT INVESTMENT x ✓✓ ✓✓ ? ? ✓ ✓ FROM IN-SCOPE MNES ✓✓- Strongly recommended Ö - Recommended ? – For consideration—will depend on country circumstances, policies, and safe harbors X – Not recommended P O L I C Y C O N S I D E R AT I O N S O N S C E N A R I O S GMT rules only apply to MNEs with annual global revenues of EUR 750 million. A de minimis applies to these rules. Entities are not in scope if they have revenues in a country of less than EUR 10 million and profitability of less than EUR 1 million. A country will need to review aggregate CbCR data and tax administration data to evaluate COUNTRY HAS NO whether there are in-scope entities of MNEs. IN-SCOPE MNES If a country does not have in-scope entities, then there is no pressing need to implement reforms. However, taking no action entails risks to listing processes and attracting investment. A potential option would be implementing a QDMTT, which would only apply to in-scope entities. This would ensure a tax code that would prevent leakage in case circumstances changed and in-scope entities were later in the jurisdiction, perhaps through new investment or a merger/acquisition. If there are Ultimate Parent Entities of in-scope MNE groups within a country, implementing the IIR is strongly recommended. It would also be prudent to implement the UTPR to reduce any incentive for the MNE to relocate to another country. COUNTRY IS THE UPE The decision to implement a QDMTT will depend on a country’s effective rates. It would be OF IN-SCOPE MNES essential if a country has entities with ETRs below 15%. As a matter of course, tax incentives should be reviewed and reformed as necessary. As with other options, there may be a case to consider broader corporate tax reforms, including base broadening. 42 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION If a country has subsidiaries of in-scope entities in cases where the ETR is at least 15%, an analysis of potential implementation options is recommended. The case for implementing different options, including the QDMTT, the IIR and the UTPR, will depend on the nature of the existing regime (including tax rates) and is likely to depend on the COUNTRY HAS safe harbor rules that will be forthcoming from the OECD. SUBSIDIARIES OF For countries with UPEs of in-scope MNEs that do not implement the IIR, a UTPR could be IN-SCOPE MNES important and implementation should be kept under review. A country can protect its tax base by introducing a QDMTT, and this may be prudent depending on the outcome of the safe harbor rules. An evaluation of tax incentives’ compatibility with GMT rules and broader investment policy is advised. If a country has entities of in-scope MNEs with an ETR of <15%, it is strongly recommended to implement a QDMTT to avoid Top-up Taxes being collected in the country of the UPE of in-scope COUNTRY HAS ENTITIES MNEs. It would also be prudent to review/reform tax incentives, particularly where the country’s OF IN-SCOPE MNES statutory rate is above 15%. WITH AN ETR OF <15% A UTPR could be important if the country of the UPE of in-scope MNEs does not implement the IIR, and implementation should be kept under review. Broader corporate tax reforms should be considered with a backstop of the QDMTT. There may be revenue benefits for a country from ensuring that domestic businesses are subject to the minimum effective tax rate and reviewing tax incentives and broader corporate income tax COUNTRY HAS LARGE policy. DOMESTIC BUSINESSES It could be the case that there are large domestic businesses within a jurisdiction that do not have entities outside that jurisdiction but may expand operations in the future. It may also be prudent to implement a QDMTT and consider implementing an IIR in case of low taxation in the country of subsidiary entities. COUNTRY IS SEEKING TO Given that 137 countries are committed to implementing or respecting the GMT rules, the ATTRACT INVESTMENT expectation is that this will become a global standard. Therefore, compliance with the GMT rules, FROM IN-SCOPE MNES along with an incentive-friendly tax system within GMT guardrails, will be an important indicator for investors. Such compliance may be determined by safe harbor rules, including the application of a QDMTT. K E Y TA K E A W AY S Box 4 summarizes the key takeaways in considering policy options for developing countries. Box 4: Key takeaways for implementation I. The global minimum tax is an important development in the international tax architecture that provides an opportunity for countries to review their corporate income tax regimes. II. For many countries the “do nothing” option is not viable. At the very least, countries will need to assess whether in- scope MNEs (domestic and foreign) operate within the country and evaluate the existing tax code, particularly tax incentive regimes. III. Qualified Domestic Top-up Taxes (QDMTT) are an important feature of the rules and can ensure that the minimum tax is applied and taxes are not topped-up elsewhere. IV. It may not be necessary for countries to implement the core GMT rules—the IIR and UTPR. V. Clarity is still needed with respect to how non-IF countries, which include many developing countries, can comply with the new GMT regime. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 43 7. >>> A roadmap toward implementation This section builds on Sections 4, 5, and 6, which examined key policy considerations, tax incentives, and implementation options for countries with respect to Pillar Two GMT rules. Recommendation 1—Confirmation the country will ensure compatibility with GMT rules and evaluate implementation options Countries may wish to signal that they will ensure their tax codes will be compatible with the October 2021 agreement and GMT rules. The signal may note progress on implementation in the EU and in G20 and OECD countries. The current expectation is that legislation will be introduced in 2022-2023, with the IIR applying from 2024 and the UTPR applying from 2025. Since work is still ongoing at the OECD with respect to practical implementation, it would be premature for a jurisdiction to finalize implementation at this point, although preparatory work should be undertaken. Regardless the option(s) chosen, it is key for countries to provide tax certainty on the path ahead to support a friendly business climate. While the new tax rules are being finalized in the IF, important considerations for countries is providing clear communications on policy considerations to stakeholders and ensuring that preparatory work is ongoing. The communications are important to better managing expectations and providing tax certainty to MNEs as well as the broader investment climate. While the implementation timeframe remains uncertain, it is recommended that countries commence the preparatory work for reforms to their CIT regime. A number of steps will need to be taken, some of them complex, and these steps should be undertaken at an early stage. It is important that the process be supported by a project team from the finance ministry and the tax administration. Consultations may be needed with other areas of government such as the ministries for enterprise and foreign affairs. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 45 Recommendation 3—Stakeholder engagement It is important that countries engage with Recommendation 2—Carry out preparatory stakeholders on implementation of the work for implementation International Tax Agreement, specifically with respect to the GMT rules. The communications It is recommended that countries already start can not only assist in bringing greater certainty preparatory work for determining necessary to taxpayers (and minimizing disputes) but reforms to ensure conformity of their CIT also facilitate important input into the policy regimes with the GMT. This preparatory work development process. includes the following steps: This consultation process can examine: • Establish a project team of officials in the finance ministry and tax administration to • Implementation options; e.g., application of the guide implementation. Qualified Domestic Minimum Top-up Tax. • Analyze CbCR data to evaluate the number of • Broader policy options. in-scope MNEs and their ETRs. • Legislative amendments and administrative • Estimate revenue impact of implementing the arrangements, including simplification/ GMT if ETRs below 15%. compliance obligations. • Carry out an analysis of existing tax incentives • Tax code reforms needed to ensure conformity in terms of compatibility with the GMT Model with GMT rules; e.g., tax incentives. Rules. • Transition arrangements and timing of • Identify possible policy options for implementation. implementation, particularly with respect to tax rates and tax incentive policies. Ensure transparency in the consultation process, particularly regarding how it will feed into policy • Carry out an analysis of existing legislation and legislation. In line with good practices and identify possible legislative amendments and with reference to cooperative compliance subject to decisions on policy options. frameworks, a dialogue between individual taxpayers and the revenue administration may be necessary to better understand potential implications and issues. A critical element in a tax reform process is ensuring also help to better manage potential controversies and save certainty. In this context, communication with stakeholders can money and time for both taxpayers and governments. be beneficial in terms of managing expectations and involving stakeholders in the policy development process. WORLD BANK SUPPORT Stakeholder consultations are recommended in The global minimum tax rules are highly complex, and the implementing the GMT. The extent of the engagement new system introduces many moving parts that impact policy will depend on the circumstances in each country. The considerations. Some complexity also arises in such an engagement can offer an opportunity to get feedback on policy exercise because of the need to find compromises to achieve options, including possible simplifications in the tax code. This the necessary consensus. In addition, there are knowledge consultation process will be especially important where an gaps for officials in many countries that were not actively analysis of the tax code identifies inconsistencies between involved in developing the Model Rules. GMT rules and existing tax incentive arrangements, such as tax-free zones or tax holidays. These regimes sometimes Well-resourced countries have indicated that the GMT include contractual commitments between a country and an is a challenging exercise and have already started the MNE/investor (e.g., fiscal stability pacts). In these cases, it is implementation process by establishing internal project teams important that there is early engagement to arrive at mutually and commencing public consultations. Implementing the GMT beneficial arrangements that acknowledge GMT rules will not is expected to be very challenging for low-capacity countries; recognize such arrangements if the ETR on a jurisdictional in this context, the World Bank stands ready to support blending basis is lower than 15%. These arrangements could countries in implementing the rules. 46 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION Support can be through regional seminars, including deep- ii) Supporting developing a realistic roadmap. dive technical sessions on the Model Rules, implications for tax iii) Assisting with impact assessments. incentives, broad policy options, public consultation strategy, and recommendations for implementation. Such seminars can iv) Supporting assessments of existing tax incentives and also facilitate the building of networks within the regions. compatibility with GMT rules. v) Providing advice on policy implications and options, Given the complexity of the rules, it is expected that that including to tax incentives. there will be a demand to provide technical assistance on a country level. The World Bank is well-placed to provide such vi) Assisting with the public consultations (process and assistance upon request, recognizing that countries will have analysis). different needs and priorities. vii) Assisting with drafting of legislation and implementation. World Bank support can involve: i) Capacity building with tax officials, such as providing detailed training on the GMT rules through workshops that can help shape countries’ policymaking processes. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 47 Annex 1 – October 2021 International Tax Agreement for Pillar Two The following text is an extract from the October 2021 by country reporting). Countries are free to apply the IIR to Agreement MNEs headquartered in their country even if they do not meet the threshold. Government entities, international organizations, non- OVERALL DESIGN profit organizations, pension funds or investment funds that Pillar Two consists of: are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities, organizations or funds • two interlocking domestic rules (together the Global are not subject to the GLoBE rules. anti-Base Erosion Rules (GLoBE) rules): (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a RULE DESIGN constituent entity; and (ii) an Undertaxed Payment Rule (UTPR), which denies deductions or requires an The IIR allocates top-up tax based on a top-down approach equivalent adjustment to the extent the low tax income subject to a split-ownership rule for shareholdings below 80%. of a constituent entity is not subject to tax under an IIR; and The UTPR allocates top-up tax from low-tax constituent entities including those located in the UPE jurisdiction. The • a treaty-based rule (the Subject to Tax Rule (STTR) GLoBE rules will provide for an exclusion from the UTPR for that allows source jurisdictions to impose limited source MNEs in the initial phase of their international activity, defined taxation on certain related party payments subject to tax as those MNEs that have a maximum of EUR 50 million below a minimum rate. The STTR will be creditable as a tangible assets abroad and that operate in no more than 5 covered tax under the GLoBE rules. other jurisdictions.1 This exclusion is limited to a period of 5 years after the MNE comes into the scope of the GLoBE rules for the first time. For MNEs that are in scope of the GLoBE R U L E S TAT U S rules when they come into effect the period of 5 years will start at the time the UTPR rules come into effect. • The GLoBE rules will have the status of a common approach. This means that IF members: • are not required to adopt the GLoBE rules, but, if they choose to do so, they will implement and administer E T R C A L C U L AT I O N the rules in a way that is consistent with the outcomes The GLoBE rules will operate to impose a top-up tax using provided for under Pillar Two, including in light of model an effective tax rate test that is calculated on a jurisdictional rules and guidance agreed to by the IF; basis and that uses a common definition of covered taxes and • accept the application of the GLoBE rules applied by a tax base determined by reference to financial accounting other IF members including agreement as to rule order income (with agreed adjustments consistent with the tax and the application of any agreed safe harbors. policy objectives of Pillar Two and mechanisms to address timing differences). In respect of existing distribution tax systems, there will be SCOPE no top-up tax liability if earnings are distributed within 4 years The GLoBE rules will apply to MNEs that meet the 750 million and taxed at or above the minimum level. euros threshold as determined under BEPS Action 13 (country 1 An MNE is considered to operate in a jurisdiction if that MNE has a constituent entity in that jurisdiction defined for purposes of the GMT rules. 48 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION M I N I M U M R AT E objectives, the implementation framework will include safe harbors and/or other mechanisms. The minimum tax rate used for purposes of the IIR and UTPR will be 15%. G I LT I C O - E X I S T E N C E CARVE-OUTS It is agreed that Pillar Two will apply a minimum rate on a jurisdictional basis. In that context, consideration will be given The GLoBE rules will provide for a formulaic substance carve- to the conditions under which the US GILTI regime will co- out that will exclude an amount of income that is 5% of the exist with the GLoBE rules, to ensure a level playing field. carrying value of tangible assets and payroll. In a transition period of 10 years, the amount of income excluded will be 8% SUBJECT TO TAX RULE (STTR) of the carrying value of tangible assets and 10% of payroll, IF members recognize that the STTR is an integral part of declining annually by 0.2 percentage points for the first five achieving a consensus on Pillar Two for developing countries. years, and by 0.4 percentage points for tangible assets and by IF members that apply nominal corporate income tax rates 0.8 percentage points for payroll for the last five years. below the STTR minimum rate to interest, royalties and a defined set of other payments would implement the STTR The GLoBE rules will also provide for a de minimis exclusion into their bilateral treaties with developing IF members when for those jurisdictions where the MNE has revenues of less requested to do so. The taxing right will be limited to the than EUR 10 million and profits of less than EUR 1 million. difference between the minimum rate and the tax rate on the payment. The minimum rate for the STTR will be 9%. The GLoBE rules also provide for an exclusion for international shipping income using the definition of such IMPLEMENTATION income under the OECD Model Tax Convention. Pillar Two should be brought into law in 2022, to be effective in 2023, with the UTPR coming into effect in 2024. S I M P L I F I C AT I O N S Note: The implementation timeframe has changed since the October 2021 agreement. It is now envisaged that countries To ensure that the administration of the GLoBE rules are will bring it into law over the course of 2022 and 2023, with as targeted as possible and to avoid compliance and effective implementation in 2024. administrative costs that are disproportionate to the policy THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 49 Annex 2 – State of Play of Global Implementation of Pillar Two (as of August 2022) C A N A D A I M P L E M E N TAT I O N be reached in October 2022. Concessions were made in the negotiations that are likely to have broader implications for In April 2022, Canada joined the group of countries commencing implementation elsewhere. The first is that EU Member States implementation of Pillar Two of the October 2021 agreement. with fewer than 12 in-scope Ultimate Parent Entities can delay Like other countries, Canada signaled an open date in 2023 implementation of the IIR. The rationale addressed concerns for implementation. The government’s April 2022 Budget1 raised by several smaller EU Member States with respect to announced the intention “to implement Pillar Two, along with the cost-benefit of implementing the IIR in cases of a small a domestic minimum Top-up Tax that would apply to Canadian number of in-scope MNEs and an ETR greater than 15%. There entities of MNEs that are within the scope of Pillar Two. The would be no material revenue gain for these jurisdictions. The government anticipates that draft implementing legislation Commission proposal had foreseen implementation of the IIR would be publicly released for consultation and the IIR and for all EU Member States, which went beyond the common domestic minimum Top-up Tax would come into effect in 2023 approach in the October 2021 agreement. as of a date to be fixed. The UTPR would come into effect no earlier than 2024.” The second concession—the one particularly relevant for countries outside the EU—is the proposal that member Canada also launched a public consultation in the April states will be required to transpose the directive into national Budget, the principal purpose of which “is to ensure that the legislation before end 2023, applying to taxable periods draft legislation takes account of any necessary adaptations of commencing on or after December 31, 2023. This is broadly the Model Rules to the Canadian legal and income tax context, in line with implementation in 2023, which was foreseen by rather than to seek views on the major design aspects of the the October 2021 agreement, but the reality is EU Member Model Rules or broader policy considerations.” States’ implementation will to all intents and purposes be 2024. This responded to the views, voiced by several Member EUROPEAN UNION States, that introducing legislation to transpose the IIR into I M P L E M E N TAT I O N national legislation in 2022 was not possible because of parliamentary procedures and the work on critical aspects not The European Commission published a proposal for an EU yet been finalized at the OECD. The expectation is that this Directive (the Minimum Tax Directive) in late December 2021, will be welcomed by many countries globally, who were facing which transposes GMT rules into an EU legislative instrument similar implementation challenges. Such a timeframe will also that will bind the 27 EU Member States to implement through be welcomed by taxpayers, given that implementation may national legislation. This proposal for a Directive closely require systems development. followed the agreement and the Model Rules, which were finalized by the OECD working party in November 2021 and REPUBLIC OF KOREA published in December 2021 following agreement by the IF. I M P L E M E N TAT I O N EU-level negotiations have proceeded rapidly with As part of 2022 tax reform, the Korean Ministry of Strategy and discussions by EU Finance Ministers in March, April and June Finance (MOSF) announced the introduction of draft domestic 2022 being close to reaching unanimous agreement2 on a legislation for a global minimum tax on July 21.3 legal text – there is an expectation now that agreement can 1 Tax Measures: Supplementar y Information | Budget 2022. 2 So far, 26 of the 27 EU Member States have agreed the Directive. Poland lifted its reservation opposing agreement in June 2022. In the same month, however, Hungary decided to oppose agreement. Czech Republic, which now holds the EU Council of Ministers Presidency, has stated it will seek agreement in October 2022. https://www. euractiv.com/section/politics/short_news/czech-eu-presidency-aims-for-15-corporate-tax-deal-by-end-of-october/. 3 https://www.pwc.com/us/en/services/tax/library/korea-releases-draft-pillar-two-rules.html. 50 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION M A L AY S I A I M P L E M E N TAT I O N rights of others to apply the IIR and the UTPR. However, New Zealand’s consultation does refer to the current views of staff In August 2022,4 the Malaysian Ministry of Finance published “that if a critical mass of countries adopts, or is highly likely a Budget 2023 Public Consultation Paper (PCP) titled to adopt, GLoBE Rules, (they) would recommend that New “The Implementation of GLoBE Rules in Malaysia.” The Zealand take steps to join them. This will ensure New Zealand comprehensive document specifically explores the benefits rather than other countries collects the revenue from any of implementing a QDMTT and examines the role of tax undertaxed constituent entities of New Zealand headquartered incentives under the GMT, asking for suggestions on “how groups.” Malaysia could incorporate its current incentive schemes into the framework of the [GMT] Rules to ensure the incentives SWITZERLAND remain relevant to attract FDIs.” I M P L E M E N TAT I O N MAURITIUS In January 2022, Switzerland announced it would be I M P L E M E N TAT I O N applying the GMT, effective January 1, 2024.7 The Swiss intend to implement GMT by means of a constitutional The Ministry for Finance, in its 2022/2023 Budget Speech,5 amendment. Based on that decision, a temporary announced the intention to introduce a QDMTT to ensure ordinance should ensure the minimum tax rate resident companies of larger multinationals are taxed at a comes into force on the announced date. In addition, minimum rate of 15%. The bill proposes to introduce this tax Switzerland signaled that the minimum tax rate would only on a date that remains to be decided. The tax will be imposed apply to multinational companies with annual turnover of at in accordance with the GMT developed by the OECD/G20 least EUR 750 million and that the taxes will be collected by the Inclusive Framework on Base Erosion and Profit Shifting cantons for their benefit. Switzerland has already held a public (BEPS). Draft legislation was published in July 2022 for consultation on implementation and launched a consultation consultations. on GMT draft legislation in August 2022.8 NEW ZEALAND UNITED KINGDOM I M P L E M E N TAT I O N I M P L E M E N TAT I O N In May 2022, New Zealand Inland Revenue launched a In January 2022, the UK launched a public consultation on consultation6 on implementation of GMT rules, scheduled to the implementation of the GMT.9 The process signals the UK’s run into July. While recognizing the uncertainties about the intention to implement GMT in line with the Model Rules and implementation timeframe, the staff consultation was launched apply the EUR 750 million threshold. “on the basis that if the required critical mass of other countries does adopt GLoBE Rules, the Government will need to decide Significantly, with perhaps relevance to developing whether to join them in doing so. If the Government does countries, the UK is exploring the introduction of a QDMTT (or decide to adopt the rules, then consistent with the October DMT), justifying that: Statement it may be desirable for the IIR to apply in New “Rather than allowing a foreign country to charge Top- Zealand from 2023 and it will certainly be desirable for it to up Taxes in relation to any low-taxed profits of a group’s do so from 2024.” The consultation addresses key questions entities in the UK, the UK would instead impose that Top- relating to implementation. up Tax… This is because a [Domestic Minimum Tax] DMT The consultation clarifies that New Zealand has not decided would only ensure that any additional tax on UK economic whether to adopt GMT rules, recognizing the October 2021 activities and profits that results from the Pillar 2 minimum agreement does not require it. But the country accepts the tax framework is to the benefit of the UK Exchequer. In 4 See press release https://www.mof.gov.my/portal/en/news/press-release/budget-2023-tax-related-pcp and consultation https://budget.mof.gov.my/pdf/konsultasi-awam/ Public-Consultation-Paper-Globe-Rules-TAX.pdf. 5 See budget speech https://budgetmof.govmu.org/documents/2022_23budgetspeech_english.pdf and draft legislation https://mauritiusassembly.govmu.org/Documents/ Bills/intro/2022/bill1422.pdf. 6 https://taxpolicy.ird.govt.nz/-/media/project/ir/tp/publications/2022/2022-ip-oecd-pillar-two/2022-ip-oecd-pillar-two-pdf.pdf?modified=20220505013401&modi- fied=20220505013401. 7 https://www.efd.admin.ch/efd/en/home/steuern/steuern-international/implementation-oecd-minimum-tax-rate.html. 8 https://www.admin.ch/gov/fr/accueil/documentation/communiques.msg-id-89967.html. 9 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1045663/11Jan_2022_Pillar_2_Consultation_.pdf. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 51 other words, businesses would in most cases pay the 2026). The GILTI rules also allow for a foreign tax credit (FTC) same level of tax on their UK profits whether there was of up to 80% of the foreign income taxes paid by controlled a DMT or not, but rather than allow another country to foreign companies. A key difference: The existing US GILTI collect that tax, a DMT would ensure the tax is paid to the regime is calculated on a blended worldwide basis, while GMT government.” rules are calculated on the basis of jurisdictional blending. This is a clear recognition that alternative approaches could GILTI co-existence with the GMT is recognized in the lead to circumstances where the tax is paid to other countries. October 2021 agreement: “It is agreed that Pillar Two will apply a minimum rate on a jurisdictional basis. In that context, The UK published draft legislation to apply the IIR in July consideration will be given to the conditions under which the 2022.10 The proposed operative date for the IIR in the UK US GILTI regime will co-exist with the GLoBE Rules to ensure is fiscal years beginning on or after December 31, 2023, a level playing field.” mirroring the EU and others, including Switzerland. The US administration has committed to reform the U N I T E D S TAT E S GILTI to apply the 15% rate and to calculate the rate on a I M P L E M E N TAT I O N jurisdictional basis in line with the October 2021 agreement.11 It will be important for countries with US MNEs to evaluate any In the US, the Biden Administration has been a strong differences between GILTI and GMT rules that could impact supporter of the October 2021 agreement. The US introduced policy options for implementation. a minimum tax regime similar to the GMT rules in 2017—the Global Intangible Low-Tax Income (GILTI), part of the Tax Cuts In August 2022, the US agreed a 15% minimum corporate and Jobs Act (TCJA). Under existing rules, GILTI applies an tax, which is similar in concept to the QDMTT in ensuring that effective rate of 10.5% (scheduled to increase to 13.125% in large US businesses pay a minimum rate of 15%, although there are design differences.12 10 https://www.gov.uk/government/publications/introduction-of-the-new-multinational-top-up-tax. 11 https://home.treasury.gov/news/press-releases/jy0629. 12 The US minimum corporate tax and the QDMTT share the broad objective of terms of ensuring a 15% effective rate is paid. However, important differences in the rules have been highlighted; see https://taxfoundation.org/inflation-reduction-act-minimum-tax/. 52 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION Annex 3 – Identifying in-scope MNEs and estimating revenues Revenue impact is a key determining factor in implementing the GMT rules. In (many) countries, effective tax rates for all in-scope MNEs within the country exceed 15%; there will 1. Identifying in- be no Top-up Tax on the ultimate parent and no additional revenue will flow to any country. For countries with ETRs of in- scope MNEs scope MNE’s are below 15%, estimating the revenue impact has merit and can feed into decisions on policy options. U S I N G A G G R E G AT E C B C R D ATA Calculating potential revenues gains from introducing an IIR is not a simple exercise. A number of factors need to be Under BEPS Action 13, all large MNEs are required to prepare considered: a country-by-country report (CbCR) with aggregate data on the global allocation of income, profits, taxes paid, and economic • What is the ETR of in-scope entities taking into account activity among tax countries in which it operates. This CbCR the GMT base? is shared with tax administrations in these countries for use in • What are the entities’ current revenues and profits high-level transfer pricing and BEPS risk assessments. (calculated on an entity-by-entity basis or from general assumptions based on headline CbCR data)? The Ultimate Parent Entity (UPE) of an MNE Group prepares and files its CbCR with the tax administration in its jurisdiction • What are the results of a calculation based on a of tax residence. That tax administration will automatically domestic Top-up Tax or applying a new rate to estimate exchange the CbCR with the tax administration in each the revenue impact? jurisdiction listed in the CbCR as being a place in which the Initially, the analysis should be carried out on a static basis MNE group has a constituent entity resident for tax purposes. because it will be very difficult to predict firm-level behavior. This will be carried out under an international agreement Limitations on the CbCR data should be recognized. The most permitting automatic exchange of information (AEOI)—such recent available public data relates to 2017, a period preceding as the Multilateral Convention on Mutual Administrative full BEPS implementation and the 2017 US tax reforms, which Assistance in Tax Matters (MAAC), a Double Tax Convention may have already impacted firm-level behavior.1 As a result, (DTC), or a Tax Information Exchange Agreement (TIEA). A it is important that countries also use other sources of data, Qualifying Competent Authority Agreement (QCAA) that sets including information held by tax administrations, that can help out the operational details of the exchange of CbCR data ensure greater accuracy on revenue estimates. will also need to be in place. Approximately 100 countries have implemented CbCR,2 with peer reviews ongoing. This is a welcome development, but many developing countries, including members and non-members of the IF, have either not yet fully implemented CbCR or are not currently receiving the data. This creates limitations to the use of this data to analyze in-scope MNEs at the global level. However, the OECD CbCR database provides country-level information on in-scope entities, reflecting data3 provided by respective countries. 1 Research carried out in 2021 by Seamus Coffey, University College Cork, on behalf of Ireland’s Department of Finance and presented in “The changing nature of outbound royalties from Ireland and their impact on the taxation of the profits of US multinationals” has indicated a substantial shift in the destination of outbound royalty payments from Ireland. Where previously these payments would have gone to zero-tax jurisdictions, a significant amount of the payments now go directly to the US, an indicator IP was moved to the US. See https://assets.gov.ie/137516/be3d5981-44be-4cbf-9b60-2174e5d5efb3.pdf . 2 See https://www.oecd.org/tax/automatic-exchange/country-specific-information-on-country-by-country-reporting-implementation.htm#cbcrequirements. 3 OECD country CbCR data are available at https://stats.oecd.org/Index.aspx?DataSetCode=CTS_CIT#. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 53 For illustrative purposes, a selection of data from 2017 aggregate CbCRs is used below to provide key indicators for a sample of countries: TOTAL TAX NON-US TOTAL EMPLOYEES ETR US MNES REVENUE PROFITS (USD COUNTRY MNES IN MNES IN- (CASH) IN- SCOPE (000’S) (USD MILLIONS) CASH* -SCOPE SCOPE MILLIONS) (USD MILLIONS) Barbados 170 40 210 1.5 24,877 6200 22.8 0.37% Chile 378 542 920 847 266,549 25,492 45,47 17.8% Costa Rica 192 164 362 1,201 20,157 1,560 319 20.4% Dominican 128 96 224 91 7,761 1,088 214 19.6% Republic Fiji 19 25 44 3.7 853 128 28 21.5% Georgia 27 48 75 6.5 2,166 125 11 8.9% Indonesia 280 910 1,190 1,608 306,233 34,137 9,565 28% Mexico 895 1,108 2,003 3,937 871,445 54,938 18,769 31.3% South Africa 412 663 1,075 1,204 240,480 28,432 5,063 17.8% Thailand 401 1,037 1,438 1,110 293,405 23,947 3,980 16.6% Vietnam 180 693 873 622 61,609 5,242 895 17.1% *The CbCR also include data with tax paid on an accrued basis. This may result in a different tax rate. I N D I V I D U A L C O U N T R Y A N A LY S I S The CbCR data also allow a country to carry out an analysis of all entities within that country that come within scope of the GMT. Below is an example for Vietnam:4 Source: OECD tax database 4 The 2017 data for Vietnam was customised using the OECD database. 54 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION The table shows that Vietnam reported 873 in-scope MNEs • assessment of other base erosion and profit shifting in 2017, employing a total of 623,000 employees while related risks generating revenues of USD 62 billion and profits of USD 5.2 • economic and statistical analysis, where appropriate.” billion. The taxes paid on those profits (cash basis) were USD 894 million, indicating a tax rate of 17.1% was levied on those With respect to using CbCR data for economic and statistical MNEs. analysis, the OECD guidance clarifies that: While this example illustrates how to identify in-scope “the Action 13 Report does not contain guidance with MNEs within Vietnam, the indicated tax rate is not conclusive respect to the ability of tax authorities to use information because it may not take account of differences between the in CbC Reports for assessing other BEPS-related risks or existing tax base and the GMT Model Rules. In addition, this for economic and statistical analysis. CbCR information calculation may not take into account tax rates for individual may be used for economic and statistical analysis, where MNEs with effective rates lower than 15% due to tax holidays appropriate (e.g., such use is not appropriate where it is or other tax incentives that may not be GMT compliant. For this not permitted under the relevant tax convention or TIEA) reason, there may be a need to use other information sources, but no other details on this are provided. The Action 13 including tax administration data, to estimate revenue gains Report also does not define the term “BEPS-related and impacts. risks”.” C O U N T R Y L E V E L A N A LY S I S The CbCR data can provide a country with high-level information to identify MNEs in their country that are in scope of GMT rules or the equivalent. This information, coupled with other sources available to a tax administration or publicly U S I N G C B C R D ATA available information, can assist in determining the ETR There are sensitivities about using CbCR data for purposes for an entity under GMT rules and help guide decisions on other than high-level transfer pricing risks. However, Pillar implementing of Pillar Two and on its revenue impacts. Two is intended to address remaining BEPS issues, and it is A limitation for developing countries is that many of them reasonable to assume that using the data (while protecting do not receive the company specific data. Therefore, other taxpayer confidentiality) can help inform finance ministries and sources of information will be needed for revenue estimates tax administrations on implementation of GMT rules. In using and policy decisions. A suggested hybrid approach is identified CbCR data, care will be needed where only a small number of below, which uses aggregate and other information sources. entities within a country are within scope of CbCR—this could reveal tax rates paid and breach taxpayer confidentiality. The OECD has produced guidance on CbCR data, and it is HYBRID APPROACH important than countries are familiar with it:5 Alternative sources of information may be necessary given “The ability of a country to obtain and use CbC Reports is the limited availability of company specific CbCR data for conditional upon it using CbCR information appropriately. many developing countries. These may include, for example, This condition is described in paragraphs 25 and 59 of the Orbis database, which could be complemented by tax the Action 13 Report, and is given effect through Article administration data and liaisons between the tax administration 6(1) of the model legislation and paragraph 2 of Section and businesses within the jurisdiction. 5 of the multilateral and model bilateral CAAs. For these purposes, appropriate use is restricted to: A public consultation (see Annex 5) may be useful in this context, complemented by engagement with large accounting • high level transfer pricing risk assessment practices that can indicate which clients are in scope of GMT rules and estimate the ETR within the jurisdiction. 5 https://www.oecd.org/tax/beps/beps-action-13-on-country-by-country-reporting-appropriate-use-of-information-in-CbC-reports.pdf. THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 55 2. Guidance to aligns with participation exemptions and similar relief common to many IF jurisdictions; assist in calculating • Policy disallowed expenses—disallows deduction for illegal payments; revenue gains in • Stock-based compensation—prevents Top-up Tax arising in the context of book-to-tax differences implementing the IIR associated with stock-based compensation plans. c) Identify and adjust (as necessary) covered taxes. The GMT Model Rules are complex with many intricacies, not d) The amount of covered taxes with respect to an entity least of which are rules with respect to the substance carve- in a jurisdiction is divided by the GLoBE income in the out. Calculating revenue gains from implementing the IIR will jurisdiction to determine the Effective Tax Rate (ETR) for depend on what policy option is taken. the entity in the jurisdiction. e) When the ETR is below the minimum rate, the Top- Countries could decide to estimate revenue impact on up Tax percentage for the jurisdiction is calculated by an entity level, which would give greater precision, but all subtracting the ETR from the minimum rate (e.g., if the information may not be available. Perhaps a more pragmatic ETR is 10%, the Top-up Tax is equal to 15% - 10% = 5%). approach is to carry out a detailed analysis on a sample of entities and to scale this up to the full population combining f) The Top-up Tax percentage is then multiplied by the CbCR data with other sources (e.g., Orbis) that can provide excess profit in the jurisdiction to determine the amount more up to date revenue and profit data. This analysis can be of Top-up Tax. Excess profit for the jurisdiction is equal extended by scenarios that can account for the GMT objective to the GLoBE income less the substance-based income of reducing incentives to shift profits.6 exclusion (i.e., an excluded routine return on tangible assets and payroll). C A L C U L AT I O N O F T O P - >>> U P TA X AT E N T I T Y L E V E L ( S TAT I C A N A LY S I S ) F O R A SAMPLE OF COMPANIES AND SCALE UP TO THE FULL P O P U L AT I O N A suitable methodology for estimating revenues gains from GMT implementation is to calculate the Top-up Tax’s yield over the existing tax rate, making appropriate assumptions and using key parameters under the Model Rules. An important caveat is that a country may be relying on historical data when carrying out such a calculation. a) Calculate the GLoBE income for the entity—an estimate Source: Understanding The Global Minimum Effective Tax of the financial income of an entity in the jurisdiction. on Multinationals: Pillar 2: General Principles, Overview b) GLoBE income will need some adjustments to reflect the and Scope; https://thedocs.worldbank.org/en/doc/ Model Rules: e95e21b019d5aaf94d37aff0ad9203c9-0350032022/ understanding-the-global-minimum-effective-tax-on-mnes-pillar-2 • Excluded dividends; excluded equity gain or loss— avoids double counting of previously taxed income and 6 Another factor to be considered, in time, is revenue benefits that may accrue due to implementation of Pillar One, both in respect to Amount A (reallocation of taxing rights) and Amount B (simplified transfer pricing for routine activities). 56 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION Annex 4 – Examples of compliant and non-compliant tax credits and implications T H E T R E AT M E N T O F Q U A L I F I E D TA X C R E D I T S The GMT Model Rules set out what constitutes qualified and unqualified tax credits. Qualified Refundable Tax Credit means a refundable tax credit designed in a way such that it must be paid as cash or available as cash equivalents within four years from when a Constituent Entity satisfies the conditions for receiving the credit under the laws of the country granting the credit. A tax credit that is refundable in part is a Qualified Refundable Tax Credit to the extent it must be paid as cash or available as cash equivalents within four years from when a Constituent Entity satisfies the conditions for receiving the credit under the laws of the country granting the credit. A Qualified Refundable Tax Credit does not include any amount of tax creditable or refundable pursuant to a Qualified Imputation Tax or a Disqualified Refundable Imputation Tax. A Non-Qualified Refundable Tax Credit means a tax credit that is not a Qualified Refundable Tax Credit but that is refundable in whole or in part. The distinction is important because a Qualified Refundable reduction, potentially subject to a Top-up Tax that will nullify Tax Credit will be treated as income; in contrast, a Non- the impact of the tax credit. Qualified Refundable Tax Credit will be treated as a tax The examples below highlight the difference: >>> >>> E X A M P L E 1a: Qualified Refundable Tax Credit with E X A M P L E 1b: Non-Qualified Refundable Tax Credit ETR of 15% with ETR of 15% DESCRIPTION EUR MILLION EUR MILLION DESCRIPTION EUR MILLION EUR MILLION Profits 800 Profits 800 Gross CT (i.e., at 15%) 120 Gross CT (i.e., at 15%) 120 R&D credit (30) R&D credit (30) Net CT 90 Net CT 90 GLOBE CALCULATION GLOBE CALCULATION 14.46% 11.25% ETR ETR (i.e., 120 / 830) (i.e., 90/ 800) 0.54% 3.74% Top-up % Top-up % (i.e., 15% - 14.46%) (i.e., 15% - 11.25%) 4.48 30 Top-up Tax (i.e., 830 x 0.54%) Top-up Tax (i.e., 800 x 3.75%) THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 57 These examples demonstrate the importance of ensuring >>> that the design of tax incentives, such as R&D tax credits, are E X A M P L E 2b: Non-Qualified Tax Credit with ETR of consistent with GMT Model Rules. Example 1a demonstrates 18% that the net benefit of a qualified tax credit of EUR 30 million with an ETR of 15% would be EUR 25.43 million. In Example 1b, the same tax credit would give no benefit. DESCRIPTION EUR MILLION EURMILLION Profits 800 >>> Gross CT E X A M P L E 2a: Qualified Tax Credit with ETR of 18% 144 (i.e., at 18%) R&D credit (30) Net CT 114 DESCRIPTION EUR MILLION EUR MILLION GLOBE CALCULATION Profits 800 14.25% Gross CT (i.e., at 18%) 144 ETR (i.e., 114/800) R&D credit (30) 0.75% Top-up % Net CT 114 (i.e., 15% - 14.25%) GLOBE CALCULATION 6 Top-up Tax (i.e., 800 x 0.75%) 17.35% ETR (i.e., 144 / 830) These examples demonstrate that in a country has a CIT rate Top-up % 0% as ETR above 15% of 18% (i.e., above the 15% minimum tax), a non-compliant Top-up Tax 0 tax incentive could lead to a scenario whereby the ETR could go below 15%, and thus bring a country into a position where subsidiaries of MNEs would incur Top-up Tax under an IIR in the parent country in the absence of a QDMTT. 58 >>> THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION Annex 5 – Guidance on developing a consultation strategy OVERVIEW physical address for submission, information on follow-up, and information on whether responses will be published. Carrying out public consultations on GMT implementation can identify specific issues relevant to the country, including To ensure that responses are focused, it is useful to include aspects of the GMT legislation and perhaps also broader tax a series of questions that are tailored to a country’s particular policy. Several countries, including Canada, Ireland, Malaysia, implementation needs as well as referencing the specific New Zealand, and the UK have already commenced public legislation to be amended. consultations. Suggested questions, which draw on similar consultations, The process should not seek to consult on the Model Rules, include: which have been agreed by the IF. Rather, the focus should be on implementation of the rules in the country. The consultations 1 Are there any particular issues relevant to GMT may also facilitate engagement by the finance ministry and/or implementation, including any with respect to taxpayer the tax administration with individual taxpayers, representative certainty? bodies, and practitioners. A country could decide to have two 2 Are there any specific issues with respect to the rounds of consultations, the first a scoping exercise and the interaction between domestic legislation and the GMT second discussions focused on the draft legislation. Model Rules, bearing in mind the importance of ensuring consistency and coordination with other countries’ rules This process can be valuable and ensure that reforms are and the limited flexibility permitted by the common road-tested and do not lead to unforeseen consequences. In approach reflected in the Model Rules? addition, a consultation is a useful exercise in signaling to key stakeholders that a country is considering implementation— 3 Do respondents have suggestions as to existing [xxx particularly relevant because the GMT follows a common Tax Act ] provisions that should or should not be made approach. A country may also wish to signal potential policy applicable for the purposes of the GMT legislation, choices. Examples are the UK and Canada signaling adoption including any of the administrative and enforcement of the QDMTT and New Zealand indicating (the view of staff) provisions? that it would recommend implementation if GMT rules are 4 Do respondents have any suggestions regarding the being implemented in other key jurisdictions. design of the domestic minimum Top-up Tax? Are there any issues or uncertainties with how such a tax is treated It is important that consultations are well-publicized to the under the Model Rules? target audience, with an expectation of a transparent process. In line with good practices, it is important to consider: allowing 5 Are there any aspects of existing tax law, including tax a reasonable period for responses (4-6 weeks), carrying incentives, that may not be compatible with the Model out an analysis of responses, pursuing further engagement Rules or could benefit from reform arising from the Model on issues as appropriate, and ensuring the consultation is a Rules? Are there any transition issues that may need to genuine exercise to feed into the policy development process. be addressed? 6 Are there any other specific aspects of domestic C O N S U LT A T I O N D E S I G N legislation or administration that need to be considered in the context of GMT implementation? The consultation can include a narrative on the International Tax Agreement, the broad purpose of the consultation, 7 Are there any other aspects of the tax code and particular policy issues that may be under consideration, details administrative practices that could benefit from reform in on the date for submission of responses, the email address/ the context of ensuring a growth-friendly tax system that can support sustainable public finances? THE GLOBAL MINIMUM TAX: FROM AGREEMENT TO IMPLEMENTATION <<< 59