BEPS 2.0: A Guide to Implementing the Global Minimum Tax

BEPS 2.0: A Guide to Implementing the Global Minimum Tax

The OECD’s BEPS 2.0 Pillar Two rules, also known as the Global Minimum Tax (GMT), are set to be implemented in a few countries and regions starting in 2024, with broader adoption expected in 2025, including in China and Hong Kong. The GMT requires multinational enterprises (MNEs) with annual revenues exceeding €750 million to pay a minimum tax rate of 15% on profits earned in each jurisdiction where they operate.

It’s important to note that the GMT rules discussed here exclude the Subject to Tax Rule (STTR) previously introduced. Instead, they focus on the Income Inclusion Rule (IIR) and the Undertaxed Payment Rule (UTPR), both of which we’ve covered in earlier articles within the BEPS 2.0 Pillar Two series.

In previous discussions, we delved into the complex calculations involved in IIR and UTPR, as outlined by the OECD through its Model Rules (December 2021), Commentaries (March 2022), and Agreed Administrative Guidance (July 2023). However, for these intricate rules to take effect, they must be incorporated into the domestic laws of each participating country or region.

When it comes to implementing international rules domestically, the process varies. Some countries automatically enforce international treaties upon signing, while others require these treaties to be incorporated into local legislation. China falls into the former category: once China signs an international treaty, it can be enforced domestically through a simplified process, such as a notification issued by the State Tax Administration.

Given the complexity of the GMT rules, the OECD has emphasized the need for thorough evaluation to ensure proper implementation. To assist member countries and regions in effectively rolling out the GMT, the OECD published the Minimum Tax Implementation Handbook on October 11, 2023. This handbook outlines the key provisions of the rules, tax policy considerations, and factors that administrative officials and other stakeholders should evaluate when designing their implementation strategies.

According to Article 54 of the handbook, the OECD envisions two stages for countries implementing the GMT:

1. Decision-making
2. Implementation

1. Decision-Making on the Global Minimum Tax

The decision-making phase involves governments assessing whether MNEs operating within their jurisdictions are subject to the GMT and determining how to amend domestic laws accordingly. The OECD recommends evaluating both domestic and foreign operations of MNEs.

1.1 Domestic Operations

Governments first need to assess how many MNEs within their jurisdiction are affected by the GMT. This is no easy task, as authorities may not have comprehensive data on whether local enterprises meet the criteria for GMT applicability. However, the OECD can provide Country-by-Country Reporting (CbCR) data to help governments identify how many MNEs operate within their borders and the total taxes they pay.

That said, this information alone is insufficient for governments to fully evaluate the impact. Additional data from tax returns, financial statements, compliance reports, and transfer pricing documentation is needed.

Once governments have this information, they must determine whether the effective tax rate (ETR) of domestic MNEs falls below 15%. Even if the ETR is below this threshold, it doesn’t necessarily mean GMT will apply, as the rules only target enterprises exceeding specific revenue and profit thresholds. Additionally, certain exemptions based on fixed assets and payroll costs may apply, so governments must account for these factors during their evaluations.

After identifying enterprises that are genuinely subject to the GMT, governments should analyze the underlying reasons, such as:

• Is the corporate income tax rate in their jurisdiction below 15%?
• Do these enterprises benefit from tax-exempt income (e.g., capital gains)?
• Are there additional deductions (e.g., R&D expenses) contributing to the low ETR?

Once the reasons are understood, governments can decide how to respond. If only a small number of enterprises are affected and existing tax incentives are temporary, governments may choose not to take any action. However, if the number of affected enterprises and the potential tax revenue loss are significant, governments should consider countermeasures, such as:

• Domestic tax reform, such as increasing tax rates.
• Implementing a minimum tax, which doesn’t necessarily need to follow OECD standards or apply exclusively to large MNEs.
• Introducing a Qualified Domestic Minimum Top-Up Tax (QDMTT), as recommended by the OECD.

A QDMTT allows countries to tax MNEs under the IIR and UTPR rules, thereby preventing domestic tax revenues from being shifted to other jurisdictions. The OECD views QDMTTs as both simple and effective. However, given the complexity of IIR and UTPR rules, the OECD allows countries to adapt the rules flexibly to suit their needs.

1.2 Foreign Operations

Governments must also evaluate the foreign operations of MNEs to assess the potential increase in tax revenues under the GMT. They should also consider whether to apply the GMT to smaller MNEs.

2. Implementing the Global Minimum Tax

Once a decision has been made, the next step is implementation. Below are the OECD’s recommendations for how countries can incorporate the GMT into their domestic legal frameworks:

2.1 Full Incorporation into Domestic Law

Countries can choose to incorporate the entirety or key elements of the GMT rules into their domestic laws. This approach, known as full-form legislation, has been adopted by countries like Japan and the UK. However, during the incorporation process, governments must adjust the structure and language of the rules to align with their domestic legislative drafting standards.

2.2 Referencing the Rules

Alternatively, countries can cross-reference the GMT rules in their domestic legislation without fully incorporating them. This method, known as the reference approach, has been adopted by countries like Liechtenstein and New Zealand.

2.3 Mixed Approach: Legislation + Administrative Regulations

Countries don’t necessarily need to legislate the entire GMT framework. Instead, they can legislate the core elements (e.g., affected taxpayers) while addressing calculation details through administrative regulations. This approach simplifies the legislative process and allows for more flexible rule adjustments.

2.4 Keeping Rules Up to Date

The OECD plans to continuously refine the GMT framework through updates to Commentaries, Agreed Administrative Guidance, and the introduction of Safe Harbors to simplify initial implementation. It’s crucial for countries to incorporate these updates into their domestic laws promptly. Governments can either specify that their laws should be interpreted in line with the latest OECD version or periodically legislate updates to the rules.

2.5 Peer Review Mechanisms

The complexity of the GMT lies not only in the rules themselves but also in their interaction with other jurisdictions. For example, if the ultimate parent jurisdiction of an MNE imposes the GMT, intermediate holding jurisdictions cannot impose additional taxes. To ensure that domestic rules remain qualified under OECD standards, peer reviews will eventually be introduced for oversight. In the short term, self-assessments are recommended to ensure compliance.

2.6 Administrative Management

In July 2023, the OECD introduced a global minimum tax information return, which countries can use to collect data on MNEs to evaluate their GMT liabilities and risks. The OECD is also exploring the use of exchange agreements and technology to enable MNEs to file a single GMT report, which can then be shared with member countries.

Key Takeaways from the Implementation Handbook

The Minimum Tax Implementation Handbook provides valuable insights into the following critical questions:

1. Will China fully adopt the OECD’s standards for implementing the GMT?
2. How will China legislate for the GMT?
3. How will China enforce the GMT?