Global minimum tax (Pillar 2) – the key to tax equality

Introduction to Pillar 2

The global minimum tax, known as Pillar 2, is part of the OECD's Base Erosion and Profit Shifting (BEPS) 2.0 project, aimed at curbing tax avoidance by multinational corporations. This initiative ensures that these corporations pay at least 15% tax on their global income, addressing the issue of profit shifting to low-tax jurisdictions.

Context and need for Pillar 2

Tax avoidance by multinational corporations poses significant challenges to national tax systems. Pillar 2 aims to counteract these practices by promoting tax fairness and creating a level playing field in the global market. This initiative is expected to increase budget revenues for countries and reduce tax gaps​.

Scope of Pillar 2

Pillar 2 applies to multinational enterprise (MNE) groups with annual revenues exceeding 750 million euros in at least two of the four preceding fiscal years. Certain entities, such as government entities, international organizations, non-profit organizations, and pension funds, are excluded from these rules​.

Mechanism for calculating the tax

The calculation of the global minimum tax under Pillar 2 involves several key steps:

1. Determining the Tax Base (GloBE Income/Loss): Calculating the income subject to tax in each jurisdiction.
2. Identifying Covered Taxes: Determining which taxes are considered when calculating the effective tax rate.
3. Calculating the Effective Tax Rate (ETR): Establishing whether the effective tax rate in a given jurisdiction reaches at least 15%.

If the ETR is below 15%, a top-up tax is applied to bring the rate up to the minimum threshold​.

Exceptions and reliefs

Pillar 2 includes provisions for reducing the tax base based on economic substance. This allows for partial exclusion of income from taxation by considering the value of tangible fixed assets and employee compensation costs​.

Implementation and payment of the tax

The tax is generally paid in the country of residence of the ultimate parent entity (UPE). If the UPE's jurisdiction does not meet the Pillar 2 requirements, other jurisdictions where the corporation operates may apply the Income Inclusion Rule (IIR) or the Undertaxed Payments Rule (UTPR) to collect the tax​.

Global outlook on Pillar 2

Countries worldwide, including many in the European Union, are preparing to implement Pillar 2 regulations by 2024 or 2025. This includes enacting Qualified Domestic Minimum Top-up Taxes (QDMTTs) to ensure any required top-up tax is collected domestically. Businesses must prepare for new reporting obligations and adjust their tax systems accordingly​.

Conclusion

The introduction of Pillar 2 is a significant step towards global tax justice, aiming to eliminate inequalities and ensure that multinational corporations pay their fair share of taxes regardless of their operational locations. Proper preparation for the new regulations is essential for companies to comply and avoid potential penalties. The global minimum tax framework is expected to significantly reduce profit shifting and increase global corporate tax revenues by an estimated $155 billion to $192 billion annually.

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