Under Pillar 2 of the BEPS 2.0 framework, multinational enterprise groups (“covered multinational enterprise groups”) with consolidated revenues of 750 million euros or more in at least two of the four fiscal years immediately preceding the current fiscal year will be subject to the 15% global minimum tax. The global minimum tax will be implemented through two sets of complementary rules, namely:
- Rules for Recognizing Revenue — A core rule designed to impose a catch-up tax on the parent entity of a covered multinational enterprise group with respect to member entities located outside the parent entity’s jurisdiction that have an effective tax rate below 15% (“low-tax member entities”); and
- Low-Tax Profit Rule — This is a safeguard measure designed to ensure that any supplemental tax not collected in accordance with the income-based collection rules is also collected.
The two sets of rules are collectively known as the Global Anti-Base Erosion Rules (GloBE Rules), which aim to ensure that covered multinational enterprise groups pay a minimum tax of at least 15% in each jurisdiction where they operate, thereby reducing the incentive for large multinational enterprise groups to shift profits to low-tax or tax-free jurisdictions in order to minimize their tax liability. The rules also help curb the race among jurisdictions to lower corporate income tax rates in an effort to attract capital and investment.
The GloBE Rules permit jurisdictions to introduce their own qualifying local minimum top-up tax in accordance with the GloBE mechanism. A jurisdiction is considered a low-tax jurisdiction if the effective tax rate of a covered multinational enterprise group in that jurisdiction is below the minimum tax rate. A low-tax jurisdiction that has implemented a qualifying local minimum top-up tax may, as a matter of priority, levy the top-up tax on low-tax member entities located within that jurisdiction. Otherwise, the top-up tax will be levied by another jurisdiction through the application of the revenue inclusion rule or the low-tax profit rule.