Global minimum corporate income tax 

How might countries with ‘low’ or ‘no’ taxation respond?

On 5 June 2021, the G7 Finance Ministers agreed to a global minimum tax of at least 15% (initially proposed by the Organization for Economic Cooperation and Development (OECD) in their report: “Tax Challenges Arising from Digitalization – Report on Pillar Two Blueprint” or commonly referred as Pillar 2).

The purpose of the global minimum tax is to end tax competition between countries or, in other words, to “stop the race to the bottom”.

The specifics around how this global minimum tax would apply is still being negotiated by the members of the G20 and the OECD’s Inclusive Framework. However, the baseline for the discussions have been set out in Pillar 2.

In summary, under the existing Pillar 2 Blueprint, profits of multinational enterprises (MNEs) which are currently not subject to tax, or subject to an effective tax at a rate lower than the global minimum tax rate, would be subject to a minimum tax of at least 15%. This global minimum tax is intended to apply to MNEs with a consolidated group revenue of at least EUR750m (similar to the Country-by-Country Reporting threshold). Investment funds, pension funds, governmental entities, international organizations, non-profit entities, and entities subject to tax neutrality regimes may be excluded from its scope.

Broadly, the main mechanism proposed to ensure the taxation of “untaxed” profits is the Income Inclusion Rule (IIR), which operates similar to the Controlled Foreign Company rules, whereby the profits of group companies that are taxed at an effective tax rate below the minimum tax rate will be included in the tax base of the Ultimate Parent Entity (UPE) and consequently subject to a ‘top-up’ tax in that jurisdiction. If the country where the UPE is located does not adopt the IIR, the next intermediate holding company in the ownership chain would calculate and pay the ‘top-up taxes’ in respect to their low-taxed subsidiaries.

Whilst the impetus that the G7 meeting will give to the entire process cannot be understated, the process remains challenging and it will take time until a global consensus is reached, and significant technical details are finalized.

Attention now turns back to the OECD, which will meet on 30 June 2021 and 1 July 2021 in Paris to finalize further political agreement and technical details. Following this, the G20 Finance Ministers and Central Bank Governors will meet on 9 and 10 July in Venice in order to reach an initial/conceptual agreement on Pillar 2. 

In addition to the above, the G7 agreed to reach a solution on the allocation of taxing rights and application of new international tax rules and the removal of the Digital Service Tax (and similar taxes).

What will be the impact for countries that have ‘low’ or ‘no’ corporate income tax (CIT)?

Countries that do not currently levy a CIT or have effective tax rates below the proposed global minimum tax rate of 15%, will face some key decisions.

If they do nothing, these countries may effectively lose out on taxing rights and face situations where profits generated locally could be subject to tax in another country.

For example, if a UPE is located in a country with ‘low’ or ‘no’ tax and has not implemented the IIR, the next intermediary holding company in the ownership chain would calculate and pay the ‘top-up tax’ in respect to the group’s low-taxed subsidiaries profits. In this case, the ‘low’ or ‘no’ tax jurisdiction in which the UPE is located, would lose the tax revenues over which it would have had primary taxing rights like the potential tax on the profits of low tax subsidiaries.

Conversely, a UPE that is located in a country that has implemented the IIR, but has subsidiaries located in ‘low’ or ‘no’ tax countries, would include and pay the ‘top-up’ tax in respect to its low-taxed subsidiaries. In other words, the country where these subsidiaries are located would concede the tax revenues that would have corresponded to profits arising in that jurisdiction to the UPE jurisdiction.

How might countries with ‘low’ or ‘no’ CIT respond?

In view of the above, countries with ‘low’ or ‘no’ CIT might consider different approaches in responding to the global minimum tax. We have considered some potential scenarios regarding how these countries might respond as follow: 

  1. Maintain the status quo, i.e. not levy a CIT and not implement globally agreed Pillar 2 proposals in domestic tax law. This would be applicable to countries that currently do not levy CIT. This is unlikely to materialize when the country involved is a member of the OECD’s Inclusive Framework     
  2. Increase the existing CIT to meet the global minimum tax, if the current rate is lower;
  3. Implement a broad-based CIT regime that applies to all businesses; or
  4. Implement a “bifurcated” / threshold-based tax system whereby a 15% minimum tax would apply to companies forming part of a MNE Group that meet the EUR750m threshold.

The approach taken in response to the introduction of a global minimum tax will vary from country to country and may ultimately depend on the final details of how this is implemented and applied in practice. There are also important considerations for those countries that use economic tax incentives like Free Zones or sector specific incentives, and what the global minimum tax might mean for these incentives.

What should finance and tax teams consider doing at this stage?

The conceptual basis of Pillar 2 will continue to be subject to intensive negotiations and will require consensus among 139 countries that are members of the OECD’s Inclusive Framework. There is currently no visibility on the specifics that will be considered as part of the final agreement, however, taking into account the support given by the G7, the negotiation process is expected to move quickly.

We would therefore recommend businesses with a UPE in the Gulf Cooperation Council (GCC), or MNE’s with subsidiaries in the GCC, to closely monitor the developments around Pillar 2, as its implementation may have a significant impact on the regional tax landscape. Whilst the details are yet to be finalized, global groups are taking steps to evaluate the potential impact these rules may have on the group, by running scenario analysis and headline modelling in readiness for its introduction.

How can Deloitte help?

In conjunction with regular tax alerts and updates, Deloitte Middle East will be hosting a series of webinars to discuss the evolution of the negotiations on the global minimum tax and its implications for businesses operating in the Middle East.

In addition, our team of International Tax and Transfer Pricing experts can support you in understanding the potential impact of a global minimum taxation at a rate of 15%, and how this may affect your business. This could involve the following:

  • Analysis of the applicability (scope) of Pillar 2 to define whether a particular business would be considered within the scope of the rules;
  • Scenario planning and looking at the different responses’ countries may adopt and the impact of each of these responses to your business; 
  • Modelling of tax costs and impact on cashflow; and
  • Advising on appropriate tax governance, tax function design and resourcing models.

If you have any queries or would like to discuss the content of this alert in more details, please get in touch with our International Tax and Transfer Pricing experts mentioned below or your usual Deloitte contact. 

Alex Law 

 Mohamed Serokh

Jan Roderick van Abbe

Rabia Gandapur

Maria Hernandez

Danial Khalid

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