Understanding BEPS 2.0 pillar two rules and implementation strategies

These rules seek to counteract the repercussions of aggressive tax planning tactics in the digitalised and globalised economy

By Prateek Tosniwal

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Published: Tue 9 Jan 2024, 6:51 PM

In October 2021, a collaborative coalition formed by members of the Organization for Economic Co-operation and Development (OECD) and the G20 countries, marked a significant milestone by reaching an agreement on a two-pillar solution. This framework aims to address the intricate tax challenges stemming from the digitalisation of the global economy, with pillar one and pillar two at its core. Boasting participation from over 140 countries and jurisdictions, the inclusive framework underscores a collective effort towards reshaping the international tax landscape.

Pillar two, a focal point of the agreement, introduces a set of rules applicable to multinational enterprises (MNEs) with annual consolidated revenue exceeding 750 million euros. These rules seek to counteract the repercussions of aggressive tax planning tactics in the digitalised and globalised economy. The overarching goal is to ensure that MNE groups contribute their equitable share of taxes in every jurisdiction where they operate, thereby mitigating tax competition among nations. Specifically, it enforces additional taxation on the profits of in-scope MNE groups when the effective tax rate (ETR) in their operating jurisdictions falls below the 15 per cent threshold.

As a committed member of the BEPS Inclusive Framework, the UAE recently amended its corporate tax law to align with BEPS Pillar two, aiming to enforce a global minimum taxation rate of 15 per cent. This legislative adjustment enables the UAE to levy an additional tax on large MNE groups, setting the stage for an effective tax rate of 15 per cent within the UAE.

Prateek Tosniwal, Partner, MI Capital Services
Prateek Tosniwal, Partner, MI Capital Services

However, the UAE Ministry of Finance (MoF) has clarified that the implementation of Pillar 2 within the UAE is deferred until 2025. The MoF plans to engage in public consultations in the first quarter of 2024 to glean insights from relevant stakeholders regarding the design and timing of Pillar 2 rules in the UAE. This strategic delay provides a crucial window for stakeholders to actively contribute to shaping the forthcoming tax regulations.

Pillar two’s operational framework relies on global anti-base erosion rules (GloBE Rules), which function at the group level rather than individual entity levels. If an MNE group falls within the scope of these rules (in-Scope MNE), it becomes obligated to pay a minimum tax of 15 per cent in each jurisdiction where it operates.

In 2024, UAE-headquartered in-scope MNEs may find themselves subject to domestic corporate tax at a 9 per cent rate, with the potential for top-up tax on UAE profits in other implementing jurisdictions. Similarly, non-UAE headquartered in-scope MNEs may encounter top-up tax obligations in implementing jurisdictions where they have a presence. The looming implementation of GloBE Rules underscores the necessity for large MNE groups to remain vigilant in assessing their tax obligations in both the UAE and other jurisdictions where they conduct business.

The wrtier is Partner, MI Capital Services

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