Just before Christmas, the OECD published the long-awaited Global Anti-Base Erosion (GloBE) rules. This article highlights the main principles underlying the system and how the tax liability is computed.
The GloBE rules provide for a coordinated system of taxation intended to ensure large multinational enterprise (MNE) groups pay a minimum level of tax on the income arising in each of the jurisdictions they operate in. This will be achieved by imposing a top-up tax on profits arising in a jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum rate.
The GloBE rules apply to companies that are members of an MNE group with annual sales of EUR 750 million or more in the consolidated financial statements of the ultimate parent company in at least two of the four tax years immediately preceding the tax year tested.
Companies that are part of an MNE group may be permanent establishments and legal entities incorporated in countries that are not the country of the ultimate parent company. Government entities, pension funds and investment funds that are parents of an MNE group will be exempt entities to which the Pillar Two regime does not apply.
The taxable income subject to GloBE or loss will be determined according to the financial accounting net income (before any consolidation adjustments eliminating intragroup transactions) of a particular entity within the MNE group and adjusted for:
There will be a requirement for adjustment in respect of transactions between entities within the group that are not consistent with the transfer pricing principles and that are not recorded in the same amount in the financial accounts of both entities. Specific rules will apply to the assets subject to fair value or impairment accounting, flow-through entities, permanent establishments, and international shipping income.
The covered taxes computation includes:
The effective tax rate of an MNE group for a jurisdiction equals the sum of the covered taxes (above) of each entity located in the jurisdiction divided by the net GloBE income of the jurisdiction for the fiscal year (if it is a positive figure).
If the effective tax rate is below the minimum rate, the difference results in a top-up tax percentage that is applied to the jurisdictional income to determine the total amount of top-up tax. The top-up tax is allocated proportionally between the entities located in that jurisdiction and then charged to each entity liable for any top-up tax.
The top-up tax percentage for a jurisdiction for a tax year will be the positive percentage point difference (if any) computed as follows:
Top-up Tax Percentage = Minimum Rate – Effective Tax Rate
On 22 December 2021, the European Commission proposed a directive to ensure a global minimum tax rate of 15% for large MNE groups operating in the EU.
In July 2021 the OECD released Latvia’s Stage 2 Peer Review Report findings obtained in peer-reviewing its progress with implementing the Minimum Standard of BEPS Action 14 for improving tax dispute resolution mechanisms. Stage 2 aims to monitor the implementation of recommendations arising from Latvia’s Stage 1 Peer Review Report. Overall the Stage 2 report finds that Latvia has eliminated most of the flaws found in the Stage 1 report.
We have recently written about the OECD Inclusive Framework proposals for taxing the digitalised economy that will help OECD members find a common basis for agreeing on taxation of global enterprises that is acceptable to all OECD members and jurisdictions. Despite the large number of participating members (139 members and jurisdictions pursuing different interests and representing various sizes of economy), all stakeholders understand the significance of this reform and are interested in agreeing on the urgent issues and implementing the common taxation of the digitalised economy as soon as possible. This article explores the ambitious goals of this agreement and the deadlines for concluding and implementing it, which are even more ambitious.
If an individual is considered to be tax resident simultaneously in two treaty countries (e.g. Latvia and Lithuania) according to their national law, the dispute over the person’s tax resident status will be resolved by treaty article 4(4), which provides for consecutively assessing the following criteria:
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