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Tracing The Global Minimum Tax Rule’s Path For Success

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In this Tax Notes Talk episode, Tax Notes contributing editor Nana Ama Sarfo interviews Mark Strimber of RSM US LLP, who provides an overview of the global minimum tax rule featured in the OECD/G-20’s two-pillar project and discusses the effect it could have on various tax regimes.

This transcript has been edited for length and clarity.

Nana Ama Sarfo: Hi, Mark. It’s great to have you on the podcast.

Mark Strimber: Thank you for having me today.

Nana Ama Sarfo: In October, the OECD is expected to reach a final agreement on a global minimum tax, which is part of its two-pillar international tax reform project. Unlike many international tax topics, the minimum tax has attracted a lot of mainstream attention. I’m really glad that we have you here today to break down the aspects of the proposal and what it means.

To start, could you please explain for our listeners what the OECD’s minimum tax proposal entails?

Mark Strimber: Sure. This obviously is a hot topic and there’s a lot of dialogue, debate, and discussion around the global minimum tax. As you did mention, it is a two-pillar initiative. Pillar 1 is designed and aimed at very large multinational enterprises. For example, those that might exceed €20 billion and its profitability exceeds 10 percent. Pillar 1 was designed for the very large multinational enterprises.

What is being discussed more in the marketplace is pillar 2, which introduces a global minimum tax rate, essentially meaning the minimum floor within the global tax rate cannot fall, like the minimum threshold of a tax rate. The number thrown out there currently is 15 percent.

Pillar 2 is to some degree a top-up tax, which essentially has asked all the countries to introduce into their legislation the minimum tax rate of 15 percent. But, should a specific country or jurisdiction choose not to implement that 15 percent tax rate, then the ultimate parent company or some other entity within the structure would be required or would charge the additional tax.

Say for example, the parent company is at a 20 percent rate, but it operates in a jurisdiction or has a subsidiary that operates at a 10 percent rate, which is five percentage points lower. The top-up tax in that sense would say the ultimate parent has to pay the additional 5 percent, that delta between the 15 and the 10.

The global minimum tax is designed really to even the playing field in the marketplace to give some sort of basic and minimum threshold of the tax to be charged. There are a lot of rules and nuances that have to be worked out based on the OECD’s blueprint of the global minimum tax and as different countries pass their specific legislation in regards to the global minimum tax. Certainly and hopefully we will see consistency in that. But there will be some interesting rules to flesh out.

At a very high level, there are three or four rules that are introduced into the global minimum tax. Not to get too bogged down into the details, but the rule we described is known as the income inclusion rule, which operates to require a parent entity to bring into account the lower-tax entities that it may own in order to top-up or equal the 15 percent.

As a backstop to that, they’re also proposing to introduce what they call the undertaxed payments rule, which if they are not able to achieve the 15 percent through the income inclusion rule, there could be an additional tax imposed potentially on payments that take place within the multinational enterprise group. Again, the reason for this is designed to prevent base erosion.

A third rule is the subject to tax rule out there, which is more of a treaty specific rule. That targets forced jurisdiction, which was introduced originally by the Base Erosion and Profit Shifting (BEPS) initiative. The treaties based rule targets risks to source jurisdictions where intragroup payments are taking place and are trying to take advantage of low nominal tax rates.

In the subject to tax rule, there could potentially be an additional 7.5 percent to 9 percent of withholding tax or some additional tax. That’s imposed on those types of payments such as interest and royalties.

There’s a whole set of rules and still we have to see how all that gets into legislation. But at a high level, that’s what the rule is designed to achieve.

Nana Ama Sarfo: Now, why does the world in the eyes of the OECD and others even need a global minimum tax?

Mark Strimber: That’s a great question. What we’re seeing is this is not really something new. The OECD back in 2013, or even before that, when they started the BEPS initiative, were looking essentially to target companies that were artificially allocating revenue and profits into low-tax jurisdictions.

This allowed multinational enterprises to shift profits to locations where they may not have employees. They may not have real substance. They may not have boots on the ground or investment in that country, but still they were able through the way the tax rules are designed to allocate a fair amount of profit to that jurisdiction and pay a very low tax rate. This causes a lot of anxiety in the system. Countries want to get their fair share of the revenue.

Through all of the BEPS action items, they’re designed essentially to look at this base erosion and profit shifting eroding the tax space in one jurisdiction to a lower-tax jurisdiction and shifting the profits into that jurisdiction. This is a build-off of that in the countries that companies are taking advantage of the tax system, and to a large degree unfairly paying a lot less tax than they should. There’s a lot of momentum behind this initiative for that reason alone.

There’s other reasons that are relevant as to why countries are now looking at the global minimum tax. One of them has to do with the unfortunate pandemic that we’ve experienced. There’s been a lot of costs in the system that countries are looking to recover. COVID-19 recovery through taxation is on the mind of the countries.

Countries have said that recognizing what they might view as a single country solution. The global minimum tax, if established and passed into law in each jurisdiction, means there’s more of a consistent set of rules. One doesn’t necessarily have to guess what the taxing rights or the tax law is in each country if everyone plays by the same general rule of a 15 percent minimum tax. Of course there’ll be nuances that would be developed.

A single country solution is not ideal. We’re looking for a multilateral agreement, where all the countries chime in. Single country solutions where one country decides how to tax…

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