The OECD’s BEPS 2.0 project is the second phase of a broader piece of work designed to tackle some of the challenges around taxing a digitised global economy. While BEPS 1.0 introduced some of the anti-avoidance measures we are now familiar with via the Multi-Lateral Instrument, the aim of BEPS 2.0 is to set a global minimum Effective Tax Rate (“ETR”), being a rate at which the profits of multinationals will be taxed, writes Joe O'Mara, Head of Aviation Finance.
While the BEPS 2.0 project is still a distance away from agreement, some early clarity is emerging around the expected shape of the rules. There is a push towards reaching agreement in the second half of 2021, with some suggestion that the arrival of a new administration in Washington D.C. has made that more likely. In our podcast, we discuss some of the likely outcomes of the discussions, with a particular focus on how the new rules might play out for aviation lessors headquartered in Ireland and elsewhere.
BEPS 2.0 rules
BEPS 2.0 will consist of two broad pillars of rules. Pillar One is expected to feature a carve-out for financial services industries; we anticipate that this carve-out should include aviation lessors. Pillar Two therefore is expected to be the area of greatest impact to the aviation leasing industry. In addition, it appears likely that there will be a carveout from both pillars for multinationals with consolidated revenues of less than €750m (with the specifics around the consolidation and the exact revenue threshold still to be decided upon).
Calculating the ETR
The global minimum ETR settled upon will likely be in a range of 10% - 15% (some have suggested that 12.5% could be an acceptable midpoint). Under BEPS 2.0 as envisaged, where a multinational’s profits are not effectively taxed at that ETR, a set of rules will apply to deny tax deductions, tax a top up amount of income or deny withholding tax relief under a tax treaty. The methodology for calculation of the ETR is still under consideration; from a lessor perspective, it will be important to ensure that allowance is made for tax depreciation and accrued tax losses, so as to ensure that the ETR doesn’t penalise structures which leverage off the deferral of cash tax.
Undertaxed Payments Rule & Income Inclusion Rule
The most immediately relevant of the Pillar Two rules from an aviation lessor perspective are likely to be the Income Inclusion Rule (“IIR”), the Undertaxed Payments Rule (“UTPR”) and the Subject to Tax Rule (“STTR”). The IIR will operate as an effective CFC rule, imposing a top up tax on profits or gains held offshore in low ETR jurisdictions, whereas the UTPR will act to deny a tax deduction for intragroup payments to low ETR jurisdictions. Notably, neither rule applies to third party payments. Consequently, from an aviation lessor perspective these rules are likely to have the greatest impact on intra-group financing structures and some offshore ownership and leasing intermediary structures, which may involve payments to jurisdictions taxed at rates significantly lower than Ireland’s 12.5%.
Subject to Tax Rule
Unlike the IIR and UTPR, which if introduced will impact on a jurisdiction’s domestic law, the STTR is envisaged as a treaty-based rule which, like the Multi-Lateral Instrument, will deny treaty relief in certain circumstances. Specifically, it is expected that the STTR will apply to deny relief for withholding tax where a payment is made to a payee resident in a jurisdiction in which the payment is subject to tax at less than a given nominal rate. This nominal rate will be less than the ETR, and is expected to fall in the region of 7.5%. Like the IIR and UTPR, the STTR is expected to apply to third party payments only, meaning that we should not see it catch payments of rentals to Irish headquartered lessors. In the event that the STTR is ultimately extended to third party payments, Ireland’s 12.5% headline rate leaves Irish headquartered lessors well placed. With regards to payments out of Ireland, most of Ireland’s withholding tax reliefs on outbound payments are set down in domestic law, meaning that the need for treaty relief (and hence the risk of the STTR applying) is circumscribed.
Impact on Irish HQ Lessors
There remains a long way to go in the BEPS 2.0 project. While the Biden administration may look more favourably on a globalised approach towards building consensus on international taxation, it remains to be seen whether the multiple stakeholders in the project can reach agreement on how the rules should function to achieve the aims of BEPS 2.0 without overly penalising any one sector or the industries of any one jurisdiction. As it currently stands, Pillar Two’s IIR, UTPR and STTR look like being of the most relevance to aviation lessors, taken alongside the calculation of the ETR and the setting of an appropriate effective rate. Irish headquartered aviation lessors look well placed to weather any storms arising out of the process, with most pressure likely to fall on structures based out of lower ETR jurisdictions. Consultation is ongoing, and KPMG will continue to keep aviation lessors updated as the shape and timeline of the new rules begin to crystallise.
Head of Aviation Finance
KPMG in Ireland