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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.
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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….
Thailand has recently taken a significant stride in international tax reform by joining the International Cooperation Framework on Base Erosion and Profit Shifting, a collective of over 140 economic zones initiated by the OECD/G20.
This participation aligns Thailand with a global movement aimed at addressing tax challenges presented by the digital economy through a comprehensive two-pillar solution.
The Thai Revenue Department has disclosed the guiding principles derived from this global framework, signaling a proactive approach to integrating these international tax standards.
As these proposals are in the draft stage, stakeholders have been invited to contribute their insights and feedback to refine the approach.
The Ministry of Finance is spearheading the implementation process, which involves critical actions such as:
Adhering to Pillar 2’s principles, Thailand aims to adjust its tax collection strategies to ensure fairness and efficiency in the digital age.
Funds raised from the new tax measures will be allocated to a special fund dedicated to enhancing the competitiveness of key sectors within Thailand’s economy.
Information on taxpayers benefiting from these changes will be systematically reported to the Office of the Board of Investment, ensuring oversight and alignment with investment strategies.
A key aspect of Thailand’s approach is the active solicitation of feedback from the business community, tax professionals, and other interested parties.
This open call for comments, facilitated through the Revenue Department’s and the central legal system’s websites, underscores the government’s commitment to transparency and inclusiveness in shaping its tax policy.
Thailand’s commitment to adopting the OECD/G20’s two-pillar solution is a testament to its dedication to international tax cooperation and its role in fostering a fair, sustainable global tax landscape.
As the country moves forward with these reforms, the engagement and input of stakeholders will be invaluable in ensuring that Thailand’s tax system remains competitive, equitable, and aligned with global standards.
If you have any queries about this article on Thailand Global Tax Reform, or Thai tax matters in general, then please get in touch.
On 21 March 2024, the Bahamas Financial Services Board (BFSB) and the Association of International Banks and Trust Companies (AIBT) have come forward with a significant plea to the government.
In a joint statement, these key industry stakeholders have voiced their concern over the proposed enactment of a minimum 15% global corporate tax, a move aligned with the OECD‘s Pillar Two framework aimed at modernizing international business taxation rules.
The Bahamas’ decision to introduce this tax comes as a strategy to adhere to the OECD’s base erosion and profit shifting (BEPS) initiative, targeting multinational enterprises (MNEs) with a group turnover exceeding EUR750 million annually.
The government’s plan includes unveiling draft legislation by the end of May 2024, with a legislative Bill anticipated to follow after further consultations.
However, the BFSB and AIBT have raised alarms over the proposed tax, arguing that it challenges the sovereignty of nations to manage their tax systems independently.
Their contention is that international tax regulations should pivot towards reinforcing economic substance rules and harmonizing transfer pricing standards to curb tax evasion and profit shifting.
An open letter has been dispatched to a UN committee currently penning a new international tax cooperation convention. This emerging UN convention garners support mainly from smaller jurisdictions and developing countries, advocating for more equitable tax cooperation frameworks.
The joint letter criticizes the OECD’s approach of instituting a uniform tax rate as a means to tackle avoidance and evasion by large MNEs, suggesting it would unfairly eliminate tax competition among nations.
The BFSB and AIBT propose a model where tax rules of a jurisdiction are applied based on the economic substance present, whether the tax rate is 0% or 15%.
Furthermore, the BFSB and AIBT recommend the introduction of a ‘holding’ period for countries willing to engage in the UN tax convention.
This grace period aims to streamline the adoption of new international tax standards and prevent the overlapping of efforts resulting from competing tax rules set by different international bodies.
As the Bahamas prepares to navigate through these proposed tax changes, the financial sector’s plea highlights a critical conversation about sovereignty, economic competitiveness, and fairness in the global tax landscape.
The coming months will be pivotal as the government contemplates these feedbacks and moves towards legislating this global tax initiative.
If you have any queries about this article, the Bahamas Financial Sector Appeals for Reevaluation of 15% Global Corporate Tax, or tax matters in the Bahamas more generally, then please get in touch
The Bermuda Government is consulting on the introduction of a corporate income tax, a significant policy shift driven by the OECD’s Pillar Two global minimum tax rules, known as the GloBE Rules.
This move aims to align Bermuda with international tax standards and mitigate the impact of top-up taxes under the GloBE framework.
The proposal responds to the GloBE Rules, which apply a top-up tax when the effective tax rate in a jurisdiction is below 15%. The new tax regime in Bermuda is designed to ensure that taxes paid by Multinational Enterprise Groups (MNEs) in Bermuda are accounted for under the GloBE Rules.
The Bermuda Government is considering a corporate income tax rate between 9% and 15%, aiming to avoid exceeding an overall 15% effective tax rate for MNEs operating in Bermuda.
The tax would primarily affect Bermuda businesses that are part of MNEs with annual revenue exceeding €750M.
Certain sectors, such as not-for-profit groups, pension funds, and investment funds, would be exempt from this corporate tax.
Provisions for tax credits and qualified refundable tax credits, as defined in the GloBE Rules, will be included in the new tax regime.
Most Bermuda entities, especially those with annual revenues below €750M, will not be affected by the new tax.
The Bermuda Tax Reform Commission is exploring restructuring existing tax regimes to reduce living and business costs on the island.
The first consultation period runs from August 8 to September 8, 2023. Interested parties can submit comments through the government’s website or through legal contacts in Bermuda.
A more comprehensive second consultation is planned for later in the year to address specific aspects of the proposals, including scope, tax computations, and transitional matters.
The introduction of a corporate income tax in Bermuda marks a shift towards global tax compliance standards.
The new tax regime will affect how MNEs structure their operations and tax strategies, particularly those with significant activities in Bermuda.
Bermuda’s government must balance the new tax regime’s implications for the local economy with international tax obligations.
Bermuda’s potential introduction of a corporate income tax signifies a notable adaptation to the global tax landscape, particularly in response to the OECD’s GloBE Rules.
It also highlights the increasing international pressure on tax havens to comply with global minimum tax standards, and it underscores the need for MNEs to reassess their tax strategies in light of evolving international tax policies.
If you have any queries about this article on Bermuda Corporation Income Tax, or Bermuda tax matters in general, then please get in touch