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Unilateral To Multilateral Solution To Justify Right Of Tax Of Market Jurisdictions

 Setting Context 

OECD/G20 Inclusive Framework on BEPS working on International collaboration to end tax avoidance and resolve challenges arising out of digitalization of the economy i.e. Unilateral to Multilateral Solution to justify right of Tax of Market Jurisdictions, now seems to go on its last resolution. Out of 15 Action Plans of BEPS, 14 action plans have been already worked upon, now as on date consensus has been built on a new two Pillar plan to reform International taxation services rules and ensure that Multinational Enterprises (MNEs) pay a fair share of tax where they operate i.e. market jurisdictions.

Pillar One

Pillar one, MNEs with global turnover above 20 billion Euros and profitability above 10% to be included to start with known as in scope MNE. As per the new nexus rules, market jurisdictions will be qualifying to have taxing rights on MNE having at least 1 million euros (250,000 euros for jurisdictions having GDP lower than 40 billion euros) of Amount A thereby relocating more than $ 125 billion of profit from world’s 100 most affluent MNEs to the market jurisdictions.

Pillar Two

Pillar two secures an agreement on a global minimum tax regime. This will be implemented based on following design:

  • I) two interlocking domestic rules [together with the Global anti-base Erosion Rules (GloBE) rules]: i) an income inclusion rule (IIR) which imposes top up tax on a parent entity in respect of low taxes income of a constituent entity; and ii) an Undertaxed payment rule (UTPR), which denies deduction or requires adjustment to the extent of low tax income of a constituent entity which is not subject to tax under an IIR; and
  • II) a Treaty based rule (the Subject to Tax Rule (STTR) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate, which is creditable as a covered tax under GloBE rules.


Unilateral To Multilateral

This measures will be implemented through Multilateral Convention which requires all parties to remove all Digital Services Tax (DST) and other relevant similar measures with respect to all companies and to commit not to introduce such measures in future. The Countries which are having DST in place as on 8th Oct., 2021, are not required to their DST till Pillar one takes effect and USA agrees to terminate proposed trade actions against the countries presently having DST in place.

Read More: International Tax Planning Strategies: Overview

Concluding Remarks – Multinational Enterprises (MNE) Taxation

 Though the timeline has also been defined for each activities of this new tax regime to move from unilateral to Multilateral Solution to justify right of tax of Market Jurisdictions on digital good or services by the MNEs, which seems to be a committed

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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