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Pillar 2 and its impact on Philippine incentives

For this week's Deloitte on the dot column in The Manila Times, Tax Senior Manager Lorybeth Baldrias and Deloitte SEA Transfer Pricing Leader Carlo Navarro write about the features of BEPS Pillar 2 that could impact local tax incentives

18 September 2023

By Lorybeth Baldrias and Carlo Navarro

WHAT started as a political agreement among G7 countries has shaken the international tax scene, such that even non-members of the Organization for Economic Cooperation and Development (OECD) like the Philippines can be constrained to revisit its tax laws and incentives packages.

In December 2021, the OECD released the Global Anti-Base Erosion or GloBE Rules as part of a two-pillar solution to address the tax challenges of economic digitalization. The Pillar Two Model Rules are designed to ensure large multinational enterprises (MNEs) pay a minimum level of tax on the income arising from each jurisdiction where they operate.

In July 2023, the OECD released new documents in relation to its two-pillar solution, which included the Administrative Guidance for GloBE Rules that addressed tax credits and transitional safe harbor rules.

What will be the impact of these developments on Philippine tax incentives and the Philippine tax regime in general?

Pillar Two basics

Pillar Two rules apply where a company that operates in more than one jurisdiction has consolidated annual group revenue in excess of 750 million euros in two of the four immediately preceding fiscal years. This company would be considered an in-scope multinational corporation that would be constrained to pay a minimum tax of 15 percent in all countries where it operates.

This means that if the effective tax rate (ETR) in a particular country is below 15 percent, a top-up tax would have to be paid. The ETR is computed on a per-country basis for a multinational, such that if it has entities that enjoy a preferential tax rate, the enjoyment of such tax incentive can effectively lower the ETR for a country upon blending the tax rates of the multinational's entities within that country.

Meanwhile, under Pillar Two, there are three main rules: the Income Inclusion Rule, Undertaxed Payments Rule, and the Qualifying Domestic Minimum Top-up Tax (QDMTT), which require the collection of a top-up tax at either the subsidiary or parent level utilizing a hierarchical approach. This means the taxing right will be primarily exercised first at the level of the subsidiary, followed by the parent, and finally by another subsidiary in the multinational group.

Specifically, the QDMTT will operate as a credit against a Pillar Two top-up tax liability. While jurisdictions are not required to implement it, there is a clear incentive to do so because a QDMTT will ensure that any additional tax on economic activities in a country that results from the application of the Pillar Two framework will be collected and paid in that country.

The main impact of these new rules is to limit the benefits of tax incentives that are enjoyed by companies in a particular jurisdiction. Thus, governments may re-examine their incentive schemes to mitigate the impact of these new rules. The treatment provided by the GloBE rules on qualified refundable tax credits (QRTCs), which are incentives to engage in certain activities delivered through the allowance of offsetting of taxes or via refund of unused tax credits (in instances where a company does not have tax liabilities), may be considered as a way to provide incentives. QRTCs can be offset against other forms of taxes, such as property taxes, and thus do not require an upfront cash outlay.

Recent developments

In relation to the QDMTT, a July 2023 administrative guidance (AG) clarified practical implementation questions on the design of local QDMTT legislation and safe harbor. The AG also distinguished between the concepts of tax credits (i.e., QRTCs) and government grants. This contemplated that QRTCs are refundable in cash or cash equivalents within four years, while non-QRTCs are refundable after four years.

The AG also established new categories of interesting tax credits, which include marketable transferable tax credits (MTTCs), non-MTTCs, and other tax credits (OTCs). MTTCs are tax credits that can be used by a holder to reduce its tax liability and are legally transferable even to an unrelated party upon satisfaction of certain conditions. Non-MTTCs, on the other hand, are transferable but will no longer be deemed marketable once purchased, while OTCs are non-refundable and non-transferable.

Philippine incentives and regime changes

Considering that the Philippines is home to only a few ultimate parent entities of in-scope multinational corporations, the government may consider incorporating income inclusion rules (IIRs) to ensure the collection of taxes in the Philippines from jurisdictions where the subsidiaries of companies may be paying less than the global minimum tax.

It would also make sense to consider the adoption of the undertaxed payments rule (UTPRs) into Philippine tax laws for the Philippines to collect top-up tax liabilities from foreign UPEs that have subsidiaries in the Philippines. The adoption of QDMTTs, however, should be the priority to ensure the collection of top-up tax liabilities that arise due to its current incentives scheme.

With the corporate income tax rate now at 25 percent under the Create law, multinationals operating within Philippine shores may think that they are safe from the imposition of the top-up tax. The Philippines, under the Create law, has also rationalized tax incentives in the form of the income tax holiday (ITH) and the 5 percent special corporate income tax (SCIT).

While the ITH and SCIT attract foreign direct investors, they also lower the ETR of a multinational enjoying such. This would mean that a multinational group with Philippine entities under the ITH and SCIT would run the risk of paying a top-up tax. Without a QDMTT provision in Philippine tax laws, a multinational group would still end up paying the top-up tax but would be paying it to the tax authority of a jurisdiction other than the Philippines. In this regard, the Philippine government would benefit from amendatory tax legislation.

For a friendlier post-Pillar Two Philippine tax incentives landscape, the Philippines can also promulgate amendatory tax legislation on tax incentives in the form of MTTCs and non-MTTCs. Considering the transferable nature of MTTCs and non-MTTCs, the negotiable instruments laws of the Philippines can be relevant and suppletorily applicable. These can also provide a more interesting and exciting playing field for tax planning, which can inspire restructuring and M&As among multinational foreign direct investors to enable the transfer and utilization of MTTCs and non-MTTCs by related or unrelated parties.

The foregoing changes, if adopted by the Philippines, will no doubt alter the Philippine tax and incentives landscape and can help boost government coffers through additional tax collections from QDMTTs and transaction taxes.


As published in The Manila Times on 18 September 2023. Lorybeth Baldrias is a Senior Manager with the Tax & Legal team of Deloitte Singapore, while Carlo Navarro is Deloitte SEA's Transfer Pricing Leader.

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