Minimum tax rate

Global Anti-Base Erosion (GloBE) Proposal – Pillar Two, for Addressing the Tax Challenges of the Digitalisation of the Economy


On November 8th, 2019, the Organization for Economic Cooperation and Development (OECD) published a document for public consultation on Global Anti-Base Erosion – GloBE Proposal under the Second Pillar of the Work for Addressing the Tax Challenges of the Digitalisation of the Economy.

The OECD under Pillar One addresses the allocation of taxing rights between jurisdictions and describes proposals for new profit allocation and nexus rules based on the concepts of “significant economic presence” and the exploitation of “user participation” and “marketing intangibles” in a jurisdiction.

For its part, Pillar Two calls for the development of a co-ordinated set of rules to address ongoing risks from structures that allow MNEs to shift profit to jurisdictions where they are subject to none or very low taxation. It also provides an approach that leaves jurisdictions free to determine their own tax system, including whether they have a corporate income tax and where they set their tax rates, but considers the right of other jurisdictions to apply the rules where income is taxed at an effective tax rate below a minimum rate.

Likewise, the GloBE proposal under Pillar Two represents a substantial change to the international tax architecture. This Pillar seeks to comprehensively address remaining BEPS challenges by ensuring that the profits of internationally operating businesses are subject to a minimum tax rate. A minimum tax rate on all income reduces the incentive for taxpayers to engage in profit shifting and establishes a floor for tax competition among jurisdictions. In doing so, the GloBE proposal is intended to address the remaining BEPS challenges linked to the digitalisation of the economy, but it goes even further and addresses these challenges more broadly.

It should be noted that the four component parts of the GloBE proposal are:

  • Income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate.
  • Undertaxed payments rule that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate.
  • Switch-over rule to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum.
  • Subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.

These rules would be implemented by way of changes to domestic law and tax treaties and would incorporate a co-ordination or ordering rule to avoid the risk of double taxation that might otherwise arise where more than one jurisdiction sought to apply these rules to the same structure or arrangement.

For purposes of this OECD consultation, comments are welcome on all aspects of the Programme of Work on Pillar Two, but requested specifically on three technical design aspects of the GloBE proposal:

  1. The use of financial accounts as a starting point for the tax base determination, as well as different mechanisms to address timing differences.
  2. The level of blending under the GloBE proposal, that is the extent to which an MNE can combine high-tax and low-tax income from different sources taking into account the relevant taxes on such income in determining the effective (blended) tax rate on such income.
  3. Experience with, and views on, carve-outs and thresholds considered as part of the GloBE proposal.

In summary, these proposals could lead to significant changes on the international taxation rules under which multinational businesses operate with an extraordinarily broad scope of the proposals.

To serve as a starting point for determining the GloBE tax base, however, the ultimate parent entity’s financial accounts need to be prepared under an acceptable set of financial accounting standards or generally accepted accounting principles (GAAP). IFRS are required for listed companies in many jurisdictions around the world and are accepted for listed companies in some jurisdictions that do not otherwise require IFRS. Similarly, a number of local GAAP accounting standards, such as United States GAAP and Japanese GAAP, are also accepted by securities regulators in jurisdictions that require a different accounting standard for domestic companies.

Therefore, it is necessary to move forward in the direction of a broad consensus that limits as far as possible the proliferation of unilateral measures that will lead to an increase in cases of double taxation and with it international controversy. To this end, companies should carefully follow the evolution of the project and anticipate to analyze the potential impact on their businesses, given the broad scope and implications of the project.

B Law & Tax
International Tax & Legal Advisors.

“En B LAW&TAX somos especialistas en asesoramiento fiscal internacional tanto a empresas como para particulares. Si desea ampliar la presente información, estaremos encantados de poder atenderle en el 917817194 o en This email address is being protected from spambots. You need JavaScript enabled to view it.

Tags: international taxation, OECD, BEPS