Parallel EU developments exist in the EU Directive on Minimum Taxation Council Directive (EU) 2022/2523 of 14 December 2022 (EU Directive), which sets out similar (but not identical) reforms. However, the reality is that the story does not end there. This article is confined to the umbrella Pillar Two principles given by the OECD Model Rules, supplemented by the OECD Commentary published in March 2022 and Agreed Administrative Guidance published in February 2023. So, while substantive agreement by the Inclusive Framework members on the scope and detail of Pillar One has yet to be reached, Pillar Two is now well on the road towards implementation. Progress on this dynamic duo of reforms has, for a number of reasons, developed at different rates. To date, 138 member jurisdictions of the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) have committed to the approach.īroadly, Pillar One reallocates a portion of taxing rights over the residual profits of large MNEs in favour of market jurisdictions and Pillar Two (which is the focus of this article) looks to impose a 15% effective minimum corporation tax rate on the profits of in-scope MNEs. However, the difficulties posed by digitalisation were considered to be particularly challenging, and work on these continued, ultimately leading to political agreement, in October 2021, on the so-called “two-pillar solution”. These prompted a great deal of work, and a raft of reforms were implemented globally as a result. Existing rules relying on concepts of residence and permanent establishment had been designed in the context of a more traditional and physical economy (most famously, the sale of champagne to thirsty customers in the UK), and it was felt that these were inadequate to deal with businesses operating remotely and with minimal physical presence. There was a concern that large MNEs were contriving to ensure that profits arose in low-tax jurisdictions artificially, and that these issues were exacerbated by the new opportunities and freedoms conferred by a digital economy. The report led to a number of further proposals for action, the first of which looked to address the tax challenges arising from the digitalisation of the economy. In this report, the OECD considered the use by multinational enterprises (MNEs) of legal constructs to shift profits cross-border, away from jurisdictions in which economic activities took place or value was created (typically, higher tax jurisdictions) and into lower tax jurisdictions. It has been something of a long and meandering journey, but the origins of Pillar Two and the global anti-base erosion (GloBE) rules can be traced back to the OECD’s base erosion and profit shifting (BEPS) project, which began in 2013 with the publication of Addressing Base Erosion and Profit Shifting. What is Pillar Two? How and why did we get here? This article considers the rules implementing the OECD’s Pillar Two proposals, including consideration of the concepts of Effective Tax Rate, the Income Inclusion Rule, the Undertaxed Payments Rule and the Subject-to-Tax Rule, as well as highlighting some of the aspects that are likely to raise issues.
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