GlobE or, the Global Minimum Tax Rate

GlobE or, the Global Minimum Tax Rate

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The international community reached a historic agreement in October 2021 regarding the two-pillar solution to the tax issues brought on by the economy's globalization and digitization. Pillar Two of this plan establishes a global minimum effective corporate tax rate of 15% for large multinational enterprises (MNEs). This has significant repercussions for the utilization of tax incentives worldwide. This report, which was written at the request of the Indonesian G20 Presidency, contains a number of specific points that nations should keep in mind as they get ready to implement Pillar Two. Under the GloBE Rules, which are an essential part of Pillar Two, if an MNE's effective tax rate (ETR) falls below 15% in a jurisdiction due to tax incentives, the MNE may be subject to top-up taxes. The effectiveness of some tax breaks may be affected by these rules. In a setting following Pillar Two, the design of tax incentives will need to be carefully rethought. The report looks at how tax incentives are used now in both developed and developing nations. It also looks at key parts of the GloBE Rules and shows how they might affect different kinds of tax incentives in different ways. The report concludes with country-specific policy recommendations.

The Global Anti-Base Erosion (GloBE) rules will be implemented in a consistent and coordinated manner by all nations that choose to do so. Due to the interconnected nature of the GloBE rules, their adoption by a sufficient number of jurisdictions will be sufficient to ensure that multinational corporations (MNCs) must pay the bare minimum in taxes on their profits in each jurisdiction in which they operate. Backstop or secondary rules apply in the event that a country where an MNE is based does not apply the primary rule, and the GloBE rules include an agreed-upon rule order. For instance, if the nation in which the MNE is headquartered does not subject the ultimate parent entity of the MNE group to the primary income inclusion rule (also known as the "IIR"), another parent entity further down the ownership chain within the group is required to apply the IIR in accordance with the agreed-upon rule order. The "UTPR," which ensures the payment of the minimum tax in all countries where the MNE has a presence through a denial of deduction or similar mechanism, kicks in even if this does not result in the income of the MNE Group being subject to tax at the minimum rate of 15%.Therefore, even if the MNE operates in or through other jurisdictions that have not implemented the rules, the interlocking nature of these rules guarantees that top-up tax will be collected in jurisdictions that have implemented the GloBE rules.

An effective tax rate test based on a common tax base and a common definition of covered taxes will be used by jurisdictions that adopt the GloBE rules to determine whether an MNE is subject to an effective tax rate below the agreed-upon minimum rate of 15% in any jurisdiction where it operates. Countries that do not adopt the GloBE rules are not required to do so. As the foundation for the global minimum tax rules, a uniform effective tax rate test ensures a level playing field and discourages tax competition.

The GloBE rules are anticipated to increase global tax revenues by approximately USD 150 billion annually with a minimum effective tax rate of 15%.This includes the anticipated revenues from the rules themselves as well as additional corporate income tax revenues from the anticipated decrease in profit shifting activity as a result of the rules' implementation. Compared to the historically low rates on MNEs' foreign source income, the jurisdictional effective tax rate of 15% represents a significant improvement. In order to level the playing field and lessen the incentive for multinational corporations (MNCs) to move profits out of developing nations, the GloBE rules acknowledge the demands made by developing nations for rules that are more transparent, mechanical, and predictable. It is anticipated that the GloBE rules will lessen the pressure placed on governments to provide wasteful tax breaks and incentives while still allowing for some income that comes from actual substance. What's more, emerging nations are supposed to have the option to additionally safeguard their duty base through the use of a deal based Subject to Expense Rule (STTR) which will permit nations to hold their burdening right, which they might have in any case surrendered under a duty settlement, on specific installments made to related parties abroad which frequently present BEPS gambles, like interest and eminences.