Under Pillar One, ‘Amount A’ would comprise a formulaic share of the consolidated profit of a multinational enterprise (MNE) to be allocated to markets (i.e., where sales arise). Pillar One will apply to MNEs with profitability above 10% and global turnover initially above EUR20 billion (the revenue threshold may be lowered to EUR10 billion contingent on successful implementation and a review process after 7 years). The profit to be reallocated will be 25% of the residual profit in excess of 10% of revenue. There would also be a standstill and removal provisions in relation to all existing Digital Service Taxes and other similar relevant unilateral measures. Extractive industries and regulated financial services are expected to be excluded from ‘Amount A’ of Pillar One.
Under the Pillar Two ‘global anti-base erosion rules’ (GloBE), the IF members have agreed to enact a jurisdictional-level minimum tax system with a minimum effective tax rate (ETR) of 15%. Companies with global turnover above EUR750 million will be within the scope of Pillar Two, though headquarter jurisdictions could decide to apply the rules to smaller MNEs.
“We have collectively committed to an implementation roadmap. The Pillar 1 and Pillar 2 rules are due to come into effect in 2023,” Paolo Gentiloni, EU Commissioner for Economy, 30 November 2021.
‘Amount A’ under Pillar One and the Income Inclusion Rule (IIR) under Pillar Two are envisaged to be brought into law in 2022, to be effective as from 1 January 2023, with the Undertaxed Payment Rule (UTPR) envisaged to come into effect in 2024. This is an exceptionally ambitious timeline, although the EU Commission confirmed its intention to implement both Pillars by 2023.
The take-aways for Luxembourg
Pillar One
Given the expected exclusion of regulated financial services from ‘Amount A’, Pillar One is not expected to impact the Luxembourg banking and insurance industries. Funds are also envisaged to be excluded. It remains to be seen whether financial intermediaries, whose activity is to advise on and offer investment products, would be excluded from Pillar One.
Considering the thresholds of global turnover and profitability, we would not expect a significant impact for Luxembourg-based groups from the ‘Amount A’. The Statement refers to a nexus rule permitting the allocation to market jurisdictions when an MNE falling within the scope of Pillar One derives at least EUR1 million in revenue from a jurisdiction (or EUR250,000 for countries with a GDP below EUR40 billion). Although these thresholds remain to be confirmed, it is possible that some large MNE groups parented outside Luxembourg, and actively engaged in the Luxembourg market albeit without a taxable presence under current rules, may incur corporate income taxes in Luxembourg under ‘Amount A’, i.e. in case of revenue exceeding EUR1 million from Luxembourg. As such, MNE groups may face additional compliance obligations to review on an annual basis their Luxembourg sourced revenue to anticipate potential reporting under ‘Amount A’.
As such, MNE groups may face additional compliance obligations.
Pillar Two
The implementation of Pillar Two is expected to follow an EU Directive, to be implemented into the domestic legislation of the EU Member States and requiring the unanimous approval from the 27 EU Member States.
Pillar Two foresees certain exclusions, including for the international shipping industry, international organisations, regulated funds that are Ultimate Parent Entities (UPE) of an MNE group and holding companies used by such funds. The exclusion would also cover funds where regulation applies only to the fund manager, hence also Reserved Alternative Investment Funds for which the only regulatory obligation is for the fund manager to be AIFMD-authorised should be Excluded Entities. Unregulated investment vehicles, banks, insurance companies and large fund managers are not expected to be excluded.
The compliance obligations under the IIR of Pillar Two, which requires calculating the jurisdictional GloBE-ETRs for each territory where an in-scope MNE group is present, would generally fall on the Ultimate Parent Entity (UPE) of a group. It is likely that only a few Luxembourg companies would take this MNE group UPE role, unless the EU directive would follow a different approach. Further, in case an MNE group has a UPE which does not apply the IIR (or an equivalent rule), the rules are expected to follow a ‘top-down’ approach, meaning that group companies in Luxembourg that are not the UPE may need to apply the IIR or the UTPR, which acts as a backstop rule to the IIR.
The starting point for computing the GloBE tax base would be the profits or losses as determined under the GAAP of the group parent. Often this would be IFRS or equivalent standards and not Luxembourg GAAP. It remains to be seen to which extent the GloBE tax base rules would be congruent with the Luxembourg local tax rules. Differences between the GloBE tax base rules and Luxembourg tax rules could cause MNE groups to have a local ETR falling below the minimum 15% ETR required under GloBE rules, and hence potentially leading to ‘top-up tax’ to be applied.
It remains to be seen to which extent the GloBE tax base rules would be congruent with the Luxembourg local tax rules.
The proposals for the Subject to Tax Rule (STTR) mention that it would be a treaty-based rule for payments between connected parties, implemented through a separate standalone treaty provision. IF members that apply nominal corporate income tax rates below the STTR minimum rate of 9% would implement the STTR into their bilateral tax treaties with developing countries (countries with GNI per capita of USD12,535 or less, as per the data of the World Bank) on certain related party payments. Implementation of the STTR is expected to be through a new multilateral instrument (MLI 2), though its expected scope of application is expected to be narrower than the GloBE rules.
It remains to be seen how the EU envisages to implement the BEPS 2.0 project. A draft directive for the implementation of Pillar Two is expected in the next months.