An overview of the OECD’s Base Erosion and Profit Shifting 2.0 Pillar Two blueprint OECD releases BEPS 2.0 Pillar Two blueprint on the implementation of the global minimum level of tax and invites public comments
On 12 October 2020, the Organization for Economic Cooperation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting released two detailed “blueprints” in relation to its ongoing work to address the tax challenges arising from the digitalization of the economy. The OECD welcomes comments on the proposals by 14 December 2020, and will hold a virtual public consultation meeting in mid-January 2021. This article considers the Pillar Two blueprint, proposing a set of interlocking international tax rules designed to ensure that large multinational businesses pay a minimum level of tax on all profits in all jurisdictions, and focuses on Hong Kong implications and policy responses to the blueprint. The blueprint includes the following key elements: • The Global Anti-Base Erosion income inclusion rule and the undertaxed payments rule: Connected rules that are intended to ensure large multinational groups pay tax at a minimum level in each jurisdiction in which they operate. These share common rules for scope, and for calculating effective tax rates (ETRs) and top-up amounts. Both rules only apply to multinational groups with consolidated global revenues of at least €750 million. - The principal rule is the income inclusion rule (IIR), which would trigger additional “top-up tax” payable in a group’s parent company jurisdiction where the profits of group companies November 2020
in any one jurisdiction are taxed at an ETR below a minimum. A switch-over rule would apply similarly to ensure branches are within scope. - An undertaxed payments rule (UTPR) acts as a backstop for low-taxed group companies not controlled by a parent company subject to the IIR. • The subject to tax rule (STTR): A separate rule that applies before the IIR and UTPR. Paying (source) jurisdictions would be able to charge a top-up tax in respect of specific types of intragroup payments made to other group companies, where the recipient jurisdiction has a nominal tax rate less than a minimum tax rate. The rule would be applied on a payment-by-payment basis, but could be calculated and administered by way of an annual return.
Implications of the GloBE rules for Hong Kong taxpayers Groups with jurisdictional ETRs below the minimum The Global Anti-Base Erosion (GloBE) rules would only apply where jurisdictional ETR falls below a certain minimum ETR at which point the IIR or UTPR would apply. Consensus has not been reached on the minimum ETR. However, examples in the blueprint use various tax rates between 10 percent and 12.5 percent. While these rates are lower than Hong Kong’s headline tax rate of 16.5 percent, the presence of offshore claims or exempt capital disposals and other adjustments may decrease a
group’s ETR below the minimum. Groups below the minimum ETR may be subject to top-up tax and may not be able to benefit from certain favourable aspects of Hong Kong’s tax system such as exemptions, reliefs and incentives. Inbound versus Hong Kong headquartered groups Under the proposed rules, there would be a difference between groups that are inbound into Hong Kong and those that are headquartered in Hong Kong. Generally, where a group that is headquartered outside Hong Kong has implemented an IIR, the Hong Kong based operation would be subject to an IIR, such that top-up tax may be collected in respect of Hong Kong entities. However, absent a change in domestic law, the Hong Kong operation of a Hong Kong headquartered group would not be subject to the IIR of any jurisdiction, while the part of the group that operates outside Hong Kong may be subject to top-up tax from another jurisdiction's IIR. In this instance, UTPR may be applied elsewhere in the group in respect of certain intragroup payments, and top-up tax may be paid in respect of the Hong Kong headquartered operation by those jurisdictions that have an ETR above the GloBE minimum and are therefore eligible to collect top-up tax under the UTPR. As a result of limitations on the tax that can be collected under the UTPR, where intragroup payments are relatively low, groups may pay less tax overall through the application of the UTPR as compared to the IIR. 65
