On 8 October 2021, 136 countries and jurisdictions, including all OECD and G20 countries and all EU Member States, agreed to the final framework for a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. Pillar One ensures that large multinational enterprises (MNEs) will pay tax where their customers and users are located; Pillar Two introduces a global minimum tax rate of 15%. The new rules are intended to become applicable in 2023 and constitute a fundamental evolution of the international tax framework for corporates that has prevailed for more than a hundred years.
What we foresee
Pending the release of the technical implementation package in the coming months, we anticipate further contacts with the Luxembourg Ministry of Finance to secure an appropriate treatment of regulated financial services taking into consideration specialised regulated activities of the Luxembourg financial centre. We shall also continue to participate in further engagement at EU level and with the Luxembourg authorities through the EBF and UEL to secure an effective coordination of these rules at EU level and mitigate their impact on corporates operating in Luxembourg.
Pillar One is designed to re-allocate some taxing rights over the largest Multinational Enterprises (MNEs) from their home countries to the markets where they have business activities and earn profits, regardless of whether they have a physical presence there. For MNEs with a global turnover above EUR 20 billion and profitability above 10%, taxing rights over 25% of profit above the 10% threshold will be re-allocated to market jurisdictions. Participating countries will be required to remove all Digital Services taxes and similar measures and not to adopt such measures in the future.
Pillar One rules will not apply to Regulated Financial Services, on the basis that its business models and applicable regulations ensure financial institutions have a taxable nexus where they serve their customers.
Pillar Two introduces a global minimum corporate tax rate set at 15%. This is achieved by introducing:
- two interlocking domestic rules (the Global anti-Base Erosion Rules, or GloBE rules) applicable to MNEs with a global turnover of EUR 750 million (which countries are free to apply to other MNEs headquartered in their jurisdiction too):
- an Income Inclusion Rule (IIR) which tops up tax on a parent entity in respect of low taxed income of a constituent entity, using an effective tax rate test calculated on a jurisdictional basis based on common rules; and
- an Undertaxed Payment Rule (UTPR) which denies deductions to the extent low tax income of a constituent entity is not subject to tax under an IIR
- and a treaty-based rule, the Subject-To-Tax Rule (STTR), allowing source jurisdictions to impose limited source taxation to certain related party payments subject to tax below a minimum rate of 9%.
The GloBE rules will provide for a formulaic substance carve-out that will exclude an amount of income calculated as a proportion of the carrying value of tangible assets and of payroll. There will also be further exclusions and safe harbours to avoid compliance and administrative costs.
For the rules to come into effect in 2023 (and UTPR in 2024), model GloBE rules and a STTR model treaty provision will be developed by the end of November 2021; a Pillar One Multilateral Convention (MLC) will be open for signature in 2022; and a multilateral instrument (MLI) will be developed by mid-2022 to facilitate the implementation of the STTR in bilateral treaties.
Amending national legislation in 2022
Participating countries will also need to make changes to their domestic laws in 2022. The EU plans a Directive to be implemented by EU Member states with respect to Pillar One and another with respect to Pillar Two.
With respect to this latest phase of the agreement on this Two-Pillar framework, please find attached links to the following related documents:
- Statement (08/10/2021) on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy and Detailed Implementation Plan
- Press release: International community strikes a ground-breaking tax deal for the digital age (08/10/2021)
- Frequently asked questions (08/10/2021)
- Highlights brochure: Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (08/10/2021)