Subject to Tax Rule (STTR) under Global Minimum Tax

In October 2021, the OECD launched its two-pillar framework. Pillar One grants market jurisdictions the right to tax companies (such as Google and Facebook) that conduct significant business activities in their jurisdictions without establishing a physical presence or permanent establishment. We have not previously analyzed Pillar One, as it has limited practical relevance for Chinese enterprises, with very few companies being affected.

Pillar Two, on the other hand, introduces a 15% global minimum tax for multinational enterprises (MNEs) with annual revenue exceeding €750 million (approximately RMB 5.5 billion). Given that many Chinese enterprises surpass this revenue threshold, we have published numerous articles on Pillar Two. However, there is a lesser-discussed yet distinct rule within Pillar Two called the Subject to Tax Rule (STTR).

Previously, we focused on the Income Inclusion Rule (IIR) and the Undertaxed Payment Rule (UTPR). These two rules primarily involve calculating an MNE’s pre-tax profits (GloBE Income) and taxes paid (Covered Tax) in each jurisdiction to determine the effective tax rate (ETR). If the ETR falls below 15%, the shortfall is collected either through the IIR (by the ultimate or intermediate parent company) or the UTPR (by related sister companies).

However, the STTR is entirely different from the IIR and UTPR, functioning as a standalone rule. In simple terms, the STTR allows the source jurisdiction to impose up to a 9% tax on specific income paid to taxpayers in the resident jurisdiction, provided this income is taxed below 9% in the resident jurisdiction. Unlike the IIR and UTPR, which are implemented through a new international treaty framework, the STTR operates as an addendum to existing bilateral tax treaties.

The 9% cap means:

• If the taxpayer in the resident jurisdiction pays tax at a rate exceeding 9%, the source jurisdiction cannot impose additional taxes under the STTR.
• If the taxpayer in the resident jurisdiction pays tax at a rate below 9%, the source jurisdiction can impose tax on the shortfall.
• If no tax is paid in the resident jurisdiction, the source jurisdiction can apply a 9% tax rate.

The OECD’s Working Party 1 completed drafting the STTR framework on September 15, 2023, and opened it for signature by BEPS member countries on October 2, 2023. With implementation drawing closer, this series will provide an overview of the STTR framework.