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October 8, 2021

136 Inclusive Framework countries support global tax agreement

All but four nations in the OECD's 140-member Inclusive Framework October 8 announced a years-in-the-making global tax agreement addressing how the largest and most profitable multinational enterprises (MNEs) should allocate their taxable profits to customer jurisdictions under Pillar One of the OECD's project and setting a 15% global minimum tax rate aimed at ensuring that MNEs pay a minimum level of tax under Pillar Two. Today's announcement by 136 nations adds additional details to the group's July statement, including setting the minimum tax rate (the July statement set the rate at "at least 15%") and percentage of profits to be allocated to market jurisdictions, establishes target dates for implementation, and looks forward to next steps ahead of a G20 summit in Rome at the end of October.

Treasury Secretary Janet Yellen remarked at the B20 summit October 8 that the agreement on the international tax rules would be finalized in the coming weeks and acknowledged "no countries, other than the United States, have a minimum tax on foreign earnings." She released a separate statement saying, in part "more than 130 nations — including all 20 in the G20 — have agreed to a new and specific set of provisions to uniformly tax the income of multinational companies, including a global minimum tax. Rather than competing on our ability to offer low corporate rates, America will now compete on the skills of our workers and our capacity to innovate, which is a race we can win."

The July 2021 Inclusive Framework statement failed to garner support all EU members; notably Ireland, Hungary, and Estonia abstained, calling into question whether the European Union, which requires unanimity for adopting directives relating to taxation, could ultimately support the agreement. Today, those jurisdictions all joined in support of the revised statement.

The new statement also includes further details on the expected implementation of both Pillars. Regarding Pillar One, the plan is for developing and having ready for signature a multilateral treaty and model legislation early next year, in the hopes of implementing Pillar One in 2023. The convention is already under development and will be the vehicle for implementation of the newly agreed taxing right under Pillar One, as well as for the standstill and removal provisions in relation to all existing Digital Service Taxes and other similar relevant unilateral measures.

On Pillar Two and the global minimum tax, model legislation and commentary is targeted to be completed by the end of November. The statement reiterates the timeline of the July statement, that countries should legislate in 2022 for implementation in 2023.

A summary of the areas of agreement and relevant implementation follows.

Pillar One

MNEs with global sales above EUR 20 billion and profitability above 10% will be covered by the new rules, with 25% of profit above the 10% threshold to be reallocated to market jurisdictions. The quantum of Amount A to be reallocated has been set, seemingly as a compromise, at 25%, where the July statement had provided a range of between 20 -30%. The statement reiterates that extractives and regulated financial services are excluded from Amount A, but no further detail is provided to define either group.

Pillar One will be implemented via a Multilateral Convention (MLC) that will require all parties to remove all Digital Services Taxes and other relevant similar measures with respect to all companies. The IF also agreed to delay enacting any new Digital Services Taxes or other relevant similar measures, starting Oct 8, 2021, until the earlier of 2024 or the coming into force of the MLC that would be open for signature 2022 and come into force 2023.

No new details on safe harbor allocations, dispute resolution, and methods to avoid double taxation are provided in this new statement, suggesting that development of these rules has not advanced significantly since the release of the July statement.

Pillar Two

The scope and rule status of Pillar Two's minimum tax rule (the Income Inclusion Rule or IIR) and undertaxed payments rule (or UTPR) remain as agreed in the July IF statement. The agreement does not mandate members enact the IIR or the UTPR, but if they so they have pledged to implement the rules in a way that produces results consistent with the IIR design. Even if a member does not adopt an IIR it agrees to be subject to the rules (i.e., the UTPR) enacted by others.

Pillar Two continues to exclude from the IIR and UTPR: government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities, organisations or funds.

While little further detail is provided on the workings of the UTPR, which acts as a backstop to the IIR and is designed to apply when a parent jurisdiction has not adopted the IIR, the implementation timeline does delay implementation of the UTPR until one year after the IIR is supposed to take effect. The October statement confirms (and the October 2020 Blueprint suggested) the UTPR focuses on allocating top-up tax and it applies equally to the MNE's parent jurisdiction, meaning countries may trigger application of the UTPR when the MNE's parent jurisdiction has an effective tax rate below 15%.

In addition, a phase-in rule has been added to exclude MNEs that are in the initial phase of their international activity (defined as those with a maximum of EUR 50 million in tangible assets outside of their home jurisdiction and that operate in no more than 5 other jurisdictions). This phase in applies for 5 years after the MNE comes into the scope of the GloBE rules for the first time. For MNEs that are in scope of the GloBE rules when they come into effect, the period of 5 years will start at the time the UTPR rules come into effect.

Other key aspects of Pillar Two include:

  • The minimum tax rate: 15%
  • Substance carve-out: 8% for tangible assets / 10% for payroll over a ten-year transition period that will decrease over the transition period, landing at a 5% carve out for each. (This was an increase in the percentages (from 7.5%) and an extension of the transition period (from 5 years) in the July statement.
  • GILTI co-existence: No changes were made to the July IF statement, which indicated co-existence of the US GILTI regime might depend on the rules being changed to a apply based on jurisdictional method.
  • Applicability dates: model rules are targeted to be completed by December 2021, implemented in 2022, with the intention of making the IIR effective in 2023 and the UTPR effective in 2024.
  • The Subject to Tax Rule (STTR): The statement reiterates that the STTR will apply between developing countries and that an MLI will be developed by mid-2022. No additional details were provided on the subject to rule or simplification measures that are continuing to develop for purposes of Pillar Two.


Contact Information
For additional information concerning this Alert, please contact:
Washington Council Ernst & Young
   •  Any member of the group at (202) 293-7474.