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OECD declares global corporate minimum tax ‘now a reality’

Updated: Apr 9

The OECD has said global corporate tax reform plans are well underway with the implementation of a global minimum corporate tax through new legislation in the EU, the UK, Switzerland, Japan, Korea and many other countries.

In an update report to G20 finance ministers and central bank governors, the organization said the so-called Pillar Two “global minimum tax is now a reality”.

The OECD’s Two-Pillar solution was formally adopted by 138 countries and jurisdictions in October 2021 but discussion about the practical details have delayed and even threatened to derail the project.

Pillar One seeks to establish new rules on where tax should be paid, the so-called nexus rules, as well as a fundamentally new way of sharing taxing rights between countries.

The aim is to ensure that multinational tech companies pay taxes where they conduct a significant amount of business, not just where they have a physical presence, as required under existing tax rules.

Pillar Two would introduce a minimum level of tax that multinational companies must pay globally.

The measure targets zero-tax and low-tax jurisdictions, such as the Cayman Islands, but does not require them to change their tax regime.

Instead, the mechanism would allow the home jurisdictions of multinationals to tax subsidiaries in low-tax jurisdictions any amount that remains untaxed up to a rate of 15%.

Implementation guidance on minimum tax rules

On 2 February 2023, the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) agreed technical guidance to assist governments with the implementation of Pillar Two. It was another missing piece in the development of model rules for the minimum tax, which is also known as the Global Anti-Base Erosion (GloBE) Rules.

“This new 111-page Administrative Guidance (Guidance) provides tax administrations with detailed guidance on the co-ordinated design of the Global Anti-Base Erosion (GloBE) Rules and provides MNEs with greater certainty as they prepare to apply the GloBE rules from the beginning of 2024,” the update said.

The guidance includes the recognition of the US minimum tax, known as Global Intangible Low-Taxed Income (GILTI) taxes, under GloBE, and more general guidance on the scope, operation and transitional elements of the new rules.

Incorporating the existing US GILTI regime in the new rules has been one of the challenges, as the US has no intention of adopting the GloBE rules.

The guidance also features the design of Qualified Domestic Minimum Top-up Taxes, which are domestic taxes that ensure that excess profits of multinationals operating in that jurisdiction are subject to a minimum tax rate of 15%.

This would benefit developing countries, the OECD said, as it will take pressure off to offer inefficient tax incentives to multinationals to attract investment.

The guidance also includes tweaks to technical issues such as the collection of top up tax in a jurisdiction in a period where the jurisdiction has no GloBE income and on the treatment of debt releases and certain tax credit equity structures.

However, despite its optimistic tone, the OECD acknowledged that discussions are still ongoing about the so-called Subject to Tax Rule (STTR). The STTR aims to override certain tax treaty benefits and target intragroup payments that could exploit treaty provision to shift profits to low-tax jurisdictions.

The OECD said, “The Inclusive Framework is continuing its work to reach a compromise on the remaining outstanding issues to enable signature of the STTR multilateral instrument by mid-2023.”

Pillar One still up for debate

The update noted, “On Pillar One, following a year of consultation with stakeholders and the public, Inclusive Framework delegates are now working around the clock to agree the text of a Multilateral Convention (MLC) to be opened for signature by mid-2023.”

The Inclusive Framework is still working to find agreement on the building blocks to finalise the text of the Multilateral Convention (MLC).

While some of the building blocks in relation to new taxing rights are relatively stabilised, several aspects are subject to ongoing negotiations, the OECD conceded.

Pillar One will only apply to the biggest and most profitable multinational groups with both a global turnover in excess of EUR20 billion and a pre-tax profit margin above 10%.

Even if the rules are agreed, the reform will still face the political hurdle of adoption by the US Congress.

OECD raised tax collection estimates

In January 2023, the OECD released new raised estimates how much additional tax revenue countries stand to gain from the tax reform measures.

The organisation said the global minimum tax is now expected to result in extra annual revenue of US$220 billion, which represents about 9% of the global corporate income tax intake.

According to the economic impact study, Pillar One is now expected to reallocate taxing rights on about US$200 billion in profits to market jurisdictions annually. However, additional annual global tax revenue would amount to between US$13 to US$36 billion.

Cayman government: minimum tax is ‘manageable’

The Cayman Islands government has described the global minimum corporate tax in the past as “manageable” because Cayman has “minimal exposure” to multinational companies.

The financial services industry’s focus on investment funds and lack of double taxation agreements means that the minimum tax should be less of a concern, according to Financial Services Minister André Ebanks.

Importantly, the Cayman Islands will not need to, and has no intention to, change its tax system.

This may be different in Bermuda, where Premier David Burt claimed in this February’s budget presentation the new 15% minimum tax could represent “a tax windfall” if it were to be imposed in Bermuda.

Burt told legislators: “The global minimum tax will represent a fundamental change in the way that Bermuda does business and the way that Bermuda’s government raises revenue.”

While he acknowledged that some companies could leave because of the minimum tax, Burt said any tax gains would be used to reduce payroll tax and import duties.

Bermuda has formed an International Tax Working Group to make recommendations by July on changes to the domestic tax system in line with the requirements of the global minimum tax.

IMS is one of the longest established company management firms in the Cayman Islands. IMS is licensed by the Cayman Islands Monetary Authority to provide independent directors, company management and incorporation, mutual fund administration, captive insurance and trust services. For more information about our services, please contact us.

Disclaimer: this publication does not constitute legal or professional advice and should not be relied on as such.

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