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The Top-Up Tax is a key part of the OECD’s global tax reform, specifically under Pillar Two.
It is designed to ensure that multinational companies pay a minimum tax rate of 15% on their profits, even if they are operating in countries with lower tax rates.
The Top-Up Tax applies to profits that are taxed below the 15% threshold.
If a company is paying less than 15% tax in a particular country, the Top-Up Tax allows other countries to collect additional taxes to bring the total tax rate up to the minimum level.
Let’s say a company has a subsidiary in a country where the corporate tax rate is only 10%.
Under the Top-Up Tax rules, the company’s home country can impose an extra 5% tax on the profits earned in that country, making sure the company’s total tax rate meets the global minimum of 15%.
This system prevents companies from taking advantage of tax havens or countries with very low taxes, as they will always end up paying at least 15% on their profits, regardless of where those profits are earned.
The Top-Up Tax mainly affects large multinational companies with global revenues of more than €750 million.
Smaller companies that operate within one country are not impacted by this rule.
The tax is part of a broader effort by the OECD to reduce tax avoidance by multinational companies, which often shift their profits to low-tax jurisdictions to reduce their overall tax bills.
The Top-Up Tax is important because it helps create a fairer global tax system.
By ensuring that all large companies pay at least 15% tax on their profits, it reduces the incentive for companies to move their profits to tax havens or low-tax countries.
This tax reform is also expected to generate more revenue for governments, allowing them to fund important public services like healthcare, education, and infrastructure.
The Top-Up Tax is a powerful tool in the fight against tax avoidance.
By ensuring that multinational companies pay a minimum tax rate of 15%, it helps create a fairer tax system and ensures that countries can collect the tax revenue they need to support their economies.
If you have any queries about this article on What is the Top-Up Tax? – or other tax matters – then please do get in touch.
A non-cooperative tax jurisdiction is a country or territory that does not follow international tax transparency and information-sharing standards.
These jurisdictions often have low or no taxes and strict privacy laws, making them attractive to individuals and businesses looking to avoid or evade taxes in their home countries.
However, because these jurisdictions do not cooperate with international efforts to combat tax avoidance, they are often labelled as “non-cooperative” by organisations like the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD).
Non-cooperative tax jurisdictions make it easier for individuals and businesses to hide their income and assets, reducing the amount of tax revenue that countries can collect.
This can lead to significant losses for governments, which depend on taxes to fund public services like healthcare, education, and infrastructure.
In addition, non-cooperative jurisdictions often allow companies to shift their profits to low-tax or no-tax countries, a practice known as profit shifting.
This deprives the countries where the profits were actually made of tax revenue, contributing to **base erosion**.
The **EU** and the **OECD** maintain lists of non-cooperative tax jurisdictions. These lists are based on criteria like:
Countries that do not meet these criteria may be placed on a black list or grey list of non-cooperative jurisdictions.
Countries and territories on these lists may face penalties or sanctions.
For example, businesses operating in or through non-cooperative jurisdictions may be subject to higher taxes or stricter reporting requirements in other countries.
In some cases, non-cooperative jurisdictions may also face restrictions on accessing international financial markets.
Non-cooperative tax jurisdictions contribute to global tax avoidance and profit shifting, depriving countries of much-needed revenue.
By identifying and penalising these jurisdictions, the EU and OECD aim to create a fairer global tax system where companies and individuals pay their fair share of taxes.
If you have any queries about this article or on international tax matters more generally, then please get in touch.
Kenya has taken a significant step toward adopting the OECD’s global tax standards by introducing a Minimum Top-Up Tax.
This new measure ensures that multinational companies operating in Kenya will pay a minimum tax of 15% on their profits, aligning Kenya with the OECD’s Pillar Two framework.
The OECD’s Pillar Two framework was designed to prevent large corporations from avoiding taxes by shifting profits to low-tax jurisdictions.
Under this framework, countries are encouraged to introduce a global minimum tax rate of 15%.
Kenya’s new Minimum Top-Up Tax will apply to multinational corporations operating in the country, ensuring that these companies are taxed at an effective rate of at least 15%.
If a company’s profits are taxed at a lower rate, the Kenyan government will impose a top-up to bring the effective rate to 15%.
The introduction of this tax is part of a broader global effort to ensure tax fairness and prevent profit shifting.
By ensuring that companies pay at least 15% in taxes, Kenya is joining other countries in trying to curb tax avoidance strategies that see profits moved to low-tax jurisdictions.
For Kenya, this is a significant move, as many multinational companies, particularly in the tech and financial sectors, operate within the country.
Large corporations operating in Kenya will need to carefully examine their tax structures to ensure compliance with the new rules.
Companies that have relied on tax incentives or reduced tax rates will now be subject to the Minimum Top-Up Tax, potentially increasing their overall tax liabilities.
More information about Kenya’s implementation of the Minimum Top-Up Tax can be found through the Kenya Revenue Authority here.
Kenya’s decision to adopt the Minimum Top-Up Tax aligns the country with global tax standards and demonstrates its commitment to tax fairness.
This move is expected to generate additional revenue for the country while reducing the risk of tax avoidance by multinational corporations.
If you have any queries about this article on the Kenya Minimum Top-Up Tax, or tax matters in Kenya, then please get in touch.
Alternatively, if you are a tax adviser in Kenya and would be interested in sharing your knowledge and becoming a tax native, then please get in touch. There is more information on membership here.
The US Congress is set to reconvene to discuss key international tax policies, including the future of the Global Intangible Low-Taxed Income (GILTI) regime and its alignment with the OECD’s Pillar Two framework.
These discussions are expected to have a significant impact on multinational corporations that have operations abroad.
The Global Intangible Low-Taxed Income (GILTI) regime was introduced as part of the Tax Cuts and Jobs Act 2017 to prevent companies from shifting profits to low-tax jurisdictions.
Under GILTI, US multinationals must pay a minimum tax on their foreign income, even if that income is earned in countries with lower tax rates.
However, with the OECD’s Pillar Two framework setting a global minimum tax rate of 15%, the US Congress will need to decide whether to align GILTI with these new global standards.
During the upcoming session, Congress will focus on:
The decisions made during these discussions will have far-reaching consequences for US companies that operate abroad. If the GILTI regime is brought in line with OECD standards, some companies could see their tax liabilities increase. At the same time, aligning with global standards is essential for maintaining the US’s position in the international tax landscape.
The US Congress’s upcoming discussions on GILTI and international tax reform will shape the future of cross-border taxation for American companies.
These talks are part of a broader global trend towards ensuring that all companies pay a fair share of tax on their global profits.
If you have any queries about this article on GILTI or tax matters in the US, then please get in touch.
Alternatively, if you are a tax adviser in the US and would be interested in sharing your knowledge and becoming a tax native, then please get in touch. There is more information on membership here.
Pillar Two is the second part of the OECD’s global tax reform, and its main goal is to introduce a global minimum tax rate for large multinational companies.
This helps prevent companies from shifting their profits to low-tax jurisdictions, commonly known as tax havens, to avoid paying taxes.
Pillar Two introduces a global minimum tax rate of 15%.
This means that even if a company is based in a country with a tax rate lower than 15%, other countries where the company operates can “top up” the tax to ensure that the company pays at least 15% on its profits.
The global minimum tax is designed to stop companies from using tax havens to avoid paying taxes.
By ensuring that all large companies pay a minimum level of tax, the OECD hopes to create a fairer global tax system.
Under Pillar Two, countries can introduce a Top-Up Tax, which ensures that companies with subsidiaries in low-tax countries pay additional taxes to bring their total tax rate up to 15%.
The Income Inclusion Rule (IIR) allows parent companies to pay extra tax on the income of their foreign subsidiaries if those subsidiaries are taxed below the global minimum rate.
Pillar Two is a major development in the fight against tax avoidance.
By introducing a global minimum tax rate, it ensures that companies can’t take advantage of tax havens to avoid paying taxes.
This creates a more level playing field for countries and helps them collect the tax revenues they need to fund public services.
If you have any queries about this article – What is the OECD’s Pillar Two – then please don’t hesitate to get in touch.
A participation exemption is a key tax mechanism designed to avoid double taxation on income earned from foreign subsidiaries.
It allows companies to receive dividends from their foreign investments without being taxed again in the home country.
This exemption is an attractive feature for businesses with a multinational presence, as it encourages cross-border investments while eliminating the risk of double taxation.
Ireland, already known for its business-friendly tax environment, is introducing a new participation exemption as part of its tax reforms.
This is expected to enhance its appeal to multinational companies and investors looking for efficient tax structures within the EU.
Ireland’s low corporate tax rate of 12.5% has long made it a popular choice for multinationals.
Now, with the introduction of a participation exemption, Ireland is aligning itself with other European countries that already offer similar incentives.
The exemption allows Irish-based companies to receive dividends and capital gains from foreign subsidiaries without paying additional tax in Ireland, provided the subsidiary meets certain conditions.
These conditions generally require the subsidiary to be based in a country with which Ireland has a tax treaty and for the Irish company to hold at least a 5% ownership stake in the subsidiary.
This is particularly advantageous for companies looking to repatriate profits from their overseas operations, as they can now do so without incurring a tax burden in Ireland.
The new participation exemption applies under specific conditions, as follows:
This new rule makes Ireland a more attractive location for holding companies that manage international subsidiaries, further boosting its competitiveness in the global tax landscape.
Ireland’s participation exemption is expected to attract even more foreign direct investment, particularly from multinationals looking for an efficient tax regime within the EU.
By eliminating the risk of double taxation on foreign earnings, Ireland offers a compelling proposition for companies with global operations.
Furthermore, this new tax policy could encourage companies to restructure their international holdings to take advantage of Ireland’s favourable tax regime.
As many businesses seek alternatives to the UK post-Brexit, Ireland’s new participation exemption strengthens its position as a key financial hub within the EU.
While the participation exemption is a welcome addition to Ireland’s tax policies, it will need to be balanced with the global trend towards higher corporate tax transparency and compliance.
For instance, the OECD’s Pillar 2 of the Base Erosion and Profit Shifting (BEPS) initiative introduces a global minimum tax of 15%, which could limit the effectiveness of Ireland’s low-tax regime.
Moreover, Ireland’s tax policies have been scrutinised by the European Union in the past, especially regarding state aid and preferential treatment of multinationals.
The participation exemption, while beneficial, will need to comply with these international regulations.
Ireland’s introduction of a participation exemption is a strategic move that will likely increase its appeal as a destination for multinational companies.
By offering a tax-efficient way to manage foreign earnings, Ireland positions itself as a leading hub for international investments.
However, companies will need to ensure that they remain compliant with evolving global tax standards while taking advantage of this new opportunity.
For more information about Ireland Progresses New Participation Exemption, or Irish tax matters more generally, then please get in touch.
The global minimum tax is a concept designed to ensure that multinational companies pay a minimum level of tax regardless of where they are headquartered or where their profits are generated.
It is part of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, specifically within Pillar 2 of the reforms.
The idea is to prevent companies from shifting their profits to low-tax jurisdictions, also known as tax havens, to minimise their tax liabilities.
In 2024, the global minimum tax rate of 15% will take effect, marking a significant milestone in global tax reform.
This change will affect multinational companies operating across multiple jurisdictions and require new strategies to ensure compliance.
Pillar 2 is one of two pillars in the OECD’s tax reform strategy.
While Pillar 1 focuses on reallocating taxing rights, Pillar 2 introduces a global minimum tax rate to ensure that multinational companies pay at least 15% tax on their profits, regardless of where they are based.
This means that if a company operates in a country with a corporate tax rate below 15%, other countries can “top up” the tax to meet the minimum rate.
For example, if a company is headquartered in a country with a 10% corporate tax rate, another country where the company operates can impose an additional 5% tax to meet the 15% global minimum rate.
The introduction of the global minimum tax aims to tackle base erosion and profit shifting (BEPS), where companies move profits to low-tax jurisdictions to avoid paying higher taxes in the countries where they generate income.
This practice has resulted in significant tax revenue losses for many countries, particularly those in the developing world.
The OECD estimates that Pillar 2 will generate an additional $150 billion in global tax revenue each year.
This is expected to reduce the incentive for companies to engage in aggressive tax planning strategies and create a fairer tax system worldwide.
To implement Pillar 2, countries will need to adopt new laws and regulations.
These laws will allow tax authorities to assess whether multinational companies are paying the minimum tax rate.
If a company’s effective tax rate falls below 15%, the country can apply a top-up tax to ensure compliance.
One of the key features of Pillar 2 is the Income Inclusion Rule (IIR), which allows countries to tax the foreign income of a multinational if the foreign jurisdiction’s tax rate is below the global minimum.
Additionally, the Undertaxed Payments Rule (UTPR) ensures that deductions for certain payments are denied if they are made to low-tax jurisdictions.
Multinational companies will need to adapt their tax strategies to comply with the new global minimum tax rules.
This may involve restructuring operations, reviewing transfer pricing arrangements, and ensuring that they have systems in place to accurately calculate their effective tax rate in each jurisdiction.
For companies that have previously benefited from tax havens or low-tax jurisdictions, Pillar 2 could result in higher tax liabilities.
However, the global minimum tax will create a more level playing field, as companies will be less able to shift profits to low-tax countries to avoid paying higher taxes.
The introduction of the global minimum tax under Pillar 2 marks a significant shift in international tax policy.
By ensuring that companies pay at least 15% tax on their profits, regardless of where they operate, the OECD aims to reduce tax avoidance and create a fairer global tax system.
While this change will require companies to adapt, it represents a major step towards addressing the challenges of base erosion and profit shifting.
If you have any queries about this article on OECD Pillar 2, or any international tax matters, then please get in touch.
Base Erosion and Profit Shifting, or BEPS, refers to tax strategies used by multinational companies to shift their profits from high-tax countries to low-tax or no-tax jurisdictions, where they pay less or no taxes.
This practice results in less tax revenue for governments, making it harder for countries to fund public services like healthcare, education, and infrastructure.
The OECD (Organisation for Economic Co-operation and Development) introduced the BEPS initiative to tackle this issue by creating global tax rules that ensure companies pay their fair share of taxes in the countries where they make their profits.
As the global economy became more interconnected, it became easier for multinational companies to shift profits across borders.
Many companies took advantage of loopholes in international tax laws, reducing their tax bills by moving profits to tax havens. This left many countries with significantly lower tax revenues.
In 2013, the OECD launched the BEPS Action Plan, which consists of 15 actions designed to close these loopholes and ensure that multinational companies pay taxes where their economic activities occur.
The BEPS initiative is an important step towards creating a fairer global tax system.
By closing tax loopholes, BEPS ensures that countries can collect the tax revenues they need to fund essential public services.
For companies, BEPS means that they must be more transparent about their operations and comply with stricter rules on where and how they pay taxes.
If you have any queries about this article or any international tax matters then please get in touch.
Pillar One is part of the OECD’s two-pillar approach to reforming international tax rules.
It addresses the taxation challenges posed by the digital economy, where many companies earn profits in countries without having a physical presence there.
The main goal of Pillar One is to reallocate the taxing rights of large multinational companies so that countries where customers are located can tax a portion of the company’s profits, even if the company doesn’t have a physical presence in that country.
Under current tax rules, a company is usually taxed in the country where it has a physical presence, like an office or factory.
But in today’s digital world, companies can make huge profits from customers in countries where they don’t have any physical presence.
Pillar One aims to change this by allowing countries to tax a portion of the profits based on where the company’s users or customers are located.
This rule mainly applies to large multinational companies with global revenues of more than €20 billion and profitability of over 10%.
A portion of their profits—above a set threshold—will be taxed in countries where they have customers, rather than just where the company is based.
Pillar One will mostly affect the world’s largest multinational companies, especially those in the digital economy like Google, Facebook, and Amazon.
These companies generate significant profits from users around the world but don’t necessarily have offices or factories in every country where their users live.
Pillar One is a big step forward in adapting international tax rules to the realities of the digital economy.
It ensures that companies pay taxes where their customers are, even if they don’t have a physical presence in those countries.
This change is expected to help countries collect more tax revenue and create a fairer tax system for the global economy.
If you have any queries on this article (What is the OECD’s Pillar One?) – or on any international tax issues – then please get in touch.
They must have thick skin, those HMRC people.
I sometimes wonder whether it’s provided when they join or if it accumulates over their time in post.
After all, it takes either fortitude or tone deafness to keep going in the face of seemingly endless criticism.
This year alone, among other things, HMRC has been accused of allowing customer service to plummet to an all-time low and performed a rapid about-face over proposals to hang up its helpline during the summer months.
Yet there are times when persistence appears to pay off.
Take the Diverted Profits Tax (DPT), for instance, which (whisper it!) looks as though it may be changing the kind of corporate shenanigans on the part of big multi-national businesses which in the past has enabled them to minimise the amounts which they make to the Revenue.
The tax came into effect in 2015. Whilst not applying to small and medium-sized enterprises (SMEs), it is a means of countering the exploitation of overseas offices (or ‘permanent establishments’, as they’re otherwise known) to artificially reduce their UK profits and tax liabilities.
For organisations with the kind of turnover and structures which make it possible, such paper shuffling can be incredibly lucrative.
There is a sting in the tail, though.
Get caught and the sanctions – including a six per cent surcharge on top of the normal Corporation Tax rate – can be enormous. An even higher rate of 55 per cent exists in respect of specific profits in the oil industry.
Figures released last month by HMRC show that DPT generated more than £8.5 between its introduction and March last year
The Revenue’s notable scalps include the likes of the drinks giant Diageo which agreed to hand over £190 million in 2018, a settlement which I discussed with The Times at the time .
Realising that it was onto a winner, HMRC subsequently turned those thumbscrews even tighter, launching something called the Profit Diversion Compliance Facility (PDCF) the following year.
It aimed to “encourage” companies identified by some of the near 400 Revenue staff working on international tax issues as having operations which might trigger a DPT liability to “review both the design and implementation” of their policies and pay any tax due.
In short, it offers a chance to ‘fess up to any mischief and avoid being hauled over the coals and, given that it’s eked more than £732 million extra income for the Revenue, could be said to have demonstrated its worth.
Cynics might suggest that the DPT performance record, in particular, indicates that its novelty is wearing off.
The £108 million recovered in the last financial year was less than half the sum reclaimed only 12 months before.
However, I take the opposite view.
I think it is evidence that instead of using offices in far-flung corners of the globe to manipulate their balance sheets and mitigate their UK tax bills, multi-nationals accept that they now have nowhere to hide.
Of course, that is not solely down to HMRC’s efforts.
The Organisation for Economic Co-operation and Development (OECD) has, since DPT was introduced, also unveiled the Global Minimum Tax (GMT) as part of its campaign to eradicate the use of profit shifting which led to the Diverted Profits Tax.
This new measure means that multi-nationals turning over more than €750 million (£633.38 million) will be subject to a minimum 15 per cent tax rate wherever they operate in the world.
It amounts to a combination, one-two punch for the UK tax authorities, in particular. The DPT can still address individual methods not covered by the GMT’s more broad brush approach.
However, the extent to which the UK will retain DPT is perhaps up for debate as well.
To all that, we can add the Revenue’s intention, announced in January, to actually reform DPT, making it part of the wider Corporation Tax for the sake of simplicity – something which in itself is a novel and noble development in UK tax procedures.
There are, I should point out, still some companies which appear reluctant to accept that the diverted profits game is up.
The latest detailed HMRC missive describes how it “is currently carrying out about 90 reviews into multinationals with arrangements to divert profits”, inquiries which involve some £2.6 billion in potentially unpaid tax.
Furthermore, the Revenue is involved in “various international tax risk disputes where the business was not prepared to change their arrangements”. Embroiled in those proceedings led by HMRC’s Fraud Investigation Service “are a number of large businesses” who face possible civil or criminal investigation.
It may well be that corporate titans once inclined to accounting mischief have just been worn down by the Revenue’s dogged investigators.
A change in personnel on the boards of these companies coupled with the prospect of a process lasting five years and a large penalty can also persuade even the hardiest souls to call a halt to such behaviour.
Even those who remain resistant to the newly knighted Jim Harra and his colleagues can’t escape the potential reputational damage arising from the leak of sensitive documentation as has happened successively with the Pandora, Paradise and Panama Papers.
Now that HMRC is finally and effectively calling the tune, there is – with no little apologies to Axl Rose and his bandmates – less of an appetite for diversion.
That is a situation for which and for once the Revenue deserves credit.
Thanks for your patience.
If you have any queries about this article on the UK’s diverted profit tax, or other UK tax matters, then please get in touch.
Look what you’ve reduced me to….