We have the Global Minimum Tax Model Rules, now what’s next?
The OECD has released Pillar II Model Rules. Detailed, complex, with an ambitious timeline, we explore what this could mean for taxpayers.
The OECD has released Pillar II Model Rules. Detailed, complex, with an ambitious timeline
On 20 December 2021, the OECD’s Inclusive Framework released the Pillar II Model Rules. These set out the precise scope for governments to implement the Global Anti-Base Erosion (GloBE) rules introducing a global minimum tax of 15 percent as part of the two-pillar solution to address the tax challenges of the digitalisation of the economy. The Pillar II Model Rules were released ahead of associated commentary and were followed quickly by the publication of an EU Directive (which mirrored the Pillar II Model Rules closely). Over the next weeks and months we expect further developments, including: the publication of the commentary and the implementation framework; the model provision for a ‘subject to tax rule’ together with a multilateral instrument for its implementation; the start of HM Treasury consultation on the UK implementation; as well as clarification on the future of the US Global Intangible Low-Taxed Income (GILTI) rules and their co-existence with the GloBE rules.
The Pillar II Model Rules run to 70 pages and provide a common approach that governments can implement into local law as appropriate.
The rules apply to multinational enterprise (MNE) groups with consolidated revenue of more than €750 million. An income inclusion rule (IIR) will introduce a top-up tax in parent company jurisdictions in respect of subsidiaries in jurisdictions with an effective tax rate (ETR) lower than 15 percent. Furthermore, an undertaxed payment rule (UTPR) operates to deny deductions in group entities where the parent entity is not subject to a top-up tax under the IIR.
Within those concepts are detailed calculations and a host of new defined terms that will require careful navigation by taxpayers to be able to assess the potential impact. For example, a substance based carve out is included that could reduce the tax base in a group entity based upon local payroll costs and tangible assets.
Tax departments should now be using the Pillar II Model Rules to:
- Carry out a high-level evaluation of whether they will be in scope and how they could potentially be impacted (and in due course a more detailed assessment);
- Identify potential information gaps between current internal systems and new data requirements under the GloBE rules. The calculations of the GloBE tax base and covered taxes involve new tax definitions and concepts. Those groups currently closing accounts for financial year ends may wish to consider the sufficiency of their data for deferred taxes;
- Ensure close cooperation between tax and finance teams as well as communicating to C-suite and management committees on the additional cost and administrative burden this will bring;
- Monitor how and when the rules will be implemented across the world and the impact of different application of these rules and other domestic measures (e.g. domestic top-up taxes and GILTI rules); and
- Consider whether now is the time to disclose the potential impact to investors and customers, for example via annual reports and other communications.
We expect HM Treasury to launch a consultation in the short term. KPMG will be responding to the consultation and will be happy to work with clients to help ensure any concerns are addressed.
Please reach out to your KPMG contact to discuss how KPMG can assist in navigating the impact of the rules and around the issues highlighted above. We are hosting a client webinar on Tuesday 11 January 2022 where KPMG International will be providing initial reactions to the publication.
Our in-depth summary of the Pillar II Model Rules can also be found here.