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The global trend of a global minimum tax
Base erosion and profit shifting (BEPS) practices cost countries US$100-240 billion in lost revenues annually, which is equivalent to 4-10 percent of the global corporate income tax revenue.
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Here to help: Tax officers prepare to offer their services to the public on how to fill a tax document in this photo taken at Atrium Senen, Central Jakarta, on Mar. 29. ( Kompas/Totok Wijayanto)
F
ollowing the global agreement of 137 out of 141 countries of the Inclusive Framework (IF) on a two-pillar solution to address tax challenges arising from the digitalization of the economy, countries from the Organization for Economic Cooperation and Development and Group of 20 Inclusive Framework (OECD/G20 IF) have produced a progress report on Pillar One and model rules on Pillar Two. These two pillars significantly change the international tax architecture.
Pillar One aims to provide a fairer allocation of profit through the reallocation of taxing rights to market jurisdictions over a portion of profit of the largest and most profitable multinational enterprises (MNEs), regardless of the existence of physical presence in market jurisdictions. The pillar targets MNEs with a consolidated turnover above 20 billion euros (US$20 billion) and profitability over 10 percent by excluding extractive industries and regulated financial services.
New nexus and new profit allocation rules are introduced. The new nexus is sales in market jurisdictions of at least 1 million euros, while the new profit allocation rules are 25 percent of profit in excess of 10 percent of revenues. Pillar One will be implemented through a multilateral convention that is targeted to be signed by the first half of 2023 and to be implemented in 2024.
Meanwhile, Pillar Two is aimed to address the remaining base erosion and profit shifting (BEPS) issues and eliminate the competition of corporate tax rates by introducing a global minimum tax of 15 percent (global anti-base erosion/GloBE Rules) to ensure that MNEs pay at least a 15 percent effective tax rate wherever they operate.
According to the OECD, BEPS practices cost countries $100-240 billion in lost revenues annually, which is equivalent to 4-10 percent of the global corporate income tax revenue. Pillar One cannot address all BEPS risks, thus Pillar Two is essential to supplement Pillar One.
The scope of Pillar Two is MNEs with consolidated turnovers of more than 750 million euros with exclusion on government entities, international organizations, nonprofit organizations, pension funds or investment funds and International shipping income. Pillar Two offers a substance-based income exclusion, which is 5 percent of tangible assets and payrolls with a 10 year transition period. Since 15 percent minimum tax is imposed on excess profit, that is, net GloBE income minus substance based income exclusion, an amount equivalent to 5 percent of tangible assets and payrolls will be excluded from the calculation of net GloBE income.
Pillar Two will have a significant impact for developing countries. The implementation of Pillar Two may add additional revenue for developing countries. In particular, Indonesia may benefit from the implementation of GloBE Rules if the subsidiaries of Indonesian ultimate parent entity (UPE) are taxed below 15 percent effectively in other countries. In this regard, Indonesia may impose a top-up tax on the Indonesian UPE up to 15 percent.
