Pillar 2 Archives - Tax Natives

Bermuda Corporate Income Tax: Response to OECD’s Global Minimum Tax

31 December 2023 10:00 am Leave a Comment

Bermuda Corporate Income Tax – Introduction

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.

Key Aspects of the Proposed Corporate Income Tax

Purpose and Context

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.

Proposed Tax Rate

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.

Scope and Exemptions

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.

Tax Credits and Refunds

Provisions for tax credits and qualified refundable tax credits, as defined in the GloBE Rules, will be included in the new tax regime.

Impact on Local Economy

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.

Consultation Process

Initial Consultation

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.

Second Detailed Consultation

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.

Implications for Bermuda and Global Business

Alignment with International Tax Standards

The introduction of a corporate income tax in Bermuda marks a shift towards global tax compliance standards.

Potential Impact on Global Business

The new tax regime will affect how MNEs structure their operations and tax strategies, particularly those with significant activities in Bermuda.

Balancing Local and International Interests

Bermuda’s government must balance the new tax regime’s implications for the local economy with international tax obligations.

Conclusion

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.

Bermuda Corporation Income Tax – Final thoughts

If you have any queries about this article on Bermuda Corporation Income Tax, or Bermuda tax matters in general, then please get in touch.

Canada and Global Minimum Tax implementation: A closer look

17 August 2023 8:38 am Leave a Comment

Canada and Global Minimum Tax implementation – Introduction

The wheels of international tax reform continue to turn as Canada takes significant strides to implement the OECD’s Pillar Two global minimum tax (GMT) recommendations.

On August 4, 2023, the Department of Finance unveiled draft legislation outlining the implementation of two pivotal elements of Pillar Two: the income inclusion rule (IIR) and a qualified domestic minimum top-up tax (QDMTT).

The aim is to align Canada’s tax landscape with the evolving international consensus on curbing tax base erosion and profit shifting.

Let’s have a look at the key aspects of this draft legislation, along with insights into the broader implications it holds.

Pillar Two at a Glance: IIR and QDMTT Implementation

The draft legislation holds particular importance for multinational enterprises (MNEs) as it focuses on two crucial aspects of the GMT framework:

the income inclusion rule (IIR); and
the qualified domestic minimum top-up tax (QDMTT).

These provisions are designed to ensure that MNEs pay a minimum level of tax on their global income, irrespective of their jurisdiction of operation

The income inclusion rule (IIR)

The IIR, closely aligned with the OECD’s model rules and the accompanying commentary, obliges a qualifying MNE group to include a top-up amount in its income.

This amount is determined by evaluating the group’s effective tax rate against the stipulated minimum rate of 15%.

Notably, the draft legislation incorporates mechanisms for calculating this top-up amount, encompassing factors such as excess profits, substance-based income exclusions, and adjusted covered taxes.

The goal is to prevent instances where MNEs might be subject to lower tax rates in certain jurisdictions.

The qualified domestic minimum top-up tax (QDMTT)

The QDMTT, on the other hand, allows jurisdictions to implement a domestic top-up tax to align with the principles of Pillar Two.

This is aimed at domestic entities within the scope of Pillar Two, counterbalancing the global minimum tax liability.

The intricacies of the QDMTT provision, including computations and adjustments, are outlined in the draft legislation to ensure an encompassing and fair application.

Administration of GMTA

To effectively implement the Global Minimum Tax Act (GMTA), the draft legislation covers a spectrum of administrative facets.

These include provisions for assessments, appeals, enforcement, audit, collection, penalties, and other vital components to ensure the smooth functioning of the new tax regime.

As part of compliance measures, the legislation introduces the requirement of filing a GloBE information return (GIR) within 15 months of the fiscal year’s end, with potential penalties for non-compliance.

It’s important to note that the legislation doesn’t shy away from significant penalties for non-compliance.

Failure to file the required GIR within the stipulated timeframe could result in penalties of up to $1 million. Moreover, penalties may also be imposed as a percentage of taxes owed under the GMTA for not filing Part II or Part IV returns, adding a layer of urgency to adhere to these provisions.

How does GMTA live with the existing tax framework?

One of the central themes that emerge from the draft legislation is the intricate interplay between the GMTA and Canada’s existing tax framework.

While the legislation attempts to bridge these two domains, certain aspects remain to be ironed out.

Notably, the interaction between the GMTA and provisions within the Income Tax Act (ITA) raises questions about the allocation of losses or tax attributions under the ITA to offset taxes owing under the GMTA.

Additionally, the draft legislation is deliberately silent on the specifics of this interaction, particularly concerning issues like Canadian foreign affiliate and foreign accrual property regimes.

As businesses and professionals delve into the consultation process, these areas of ambiguity are likely to be focal points of discussion, aiming to ensure a harmonious alignment between the new regime and the existing tax landscape.

Looking ahead

The consultation process for the draft legislation is underway, with the Department of Finance welcoming feedback until September 29, 2023.

During this period, stakeholders, including businesses, tax professionals, and policymakers, have the opportunity to contribute insights and perspectives to shape the final legislation.

The complex and evolving nature of international taxation underscores the importance of robust consultation, as the new rules have far-reaching implications for cross-border businesses.

Canada and Global Minimum Tax – Conclusion

Canada’s proactive approach to aligning its tax laws with the global consensus on minimum taxation is a significant stride.

As the draft legislation undergoes scrutiny and refinement, it’s essential to recognize its implications not only for multinational enterprises but also for the broader tax landscape.

The interplay between the GMTA and the existing tax regime will be closely watched, highlighting the intricate path of international tax reform and the commitment of nations to creating a fair and balanced tax environment.

If you have any queries about this article on Canada and Global Minimum Tax, or Canadian tax matters in general, then please get in touch.

The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article..

UK Withdraws Digital Services Tax as OECD’s Two-Pillar Plan Takes Shape

21 March 2023 1:09 pm Leave a Comment

UK Withdraws Digital Services Tax – Introduction

The UK’s Digital Services Tax (DST), which imposes a 2% tax on the revenues of search engines, social media platforms and online marketplaces, is set to be withdrawn as part of the Organisation for Economic Co-operation and Development’s (OECD) two-pillar plan to reform international corporate taxation.

Pillar talk

The plan, announced on 1 July 2021, will see the UK commit to a 15% minimum level of global tax on large businesses under Pillar Two, in exchange for being able to tax a portion of the profits of the world’s largest businesses that are attributable to consumption in the UK under Pillar One.

DST origins

The DST was introduced in 2020 as a temporary measure to address the challenges posed by the digital economy to international corporate taxation. The tax has been effective in raising £358m from large digital businesses in the 2020/21 tax year, 30% more than originally forecast.

Pillar fight

However, the DST has faced significant international opposition, with the US arguing that digital services taxes unfairly target American firms and are discriminatory.

The compromise agreed with the US covers the interim period between January 2022 and either 31 December 2023 or the date Pillar One is implemented, whichever is earlier.

Under this compromise, the UK is able to keep its existing DSTs in place until the implementation of Pillar One, but US corporations subject to DSTs may receive tax credits against future tax liabilities.

As a compromise, the US has agreed to terminate proposed trade action and refrain from imposing any future trade actions against the UK.

The OECD’s two pillar plan

The OECD’s two-pillar plan aims to reform international corporate taxation and make it fit for the digital age.

Pillar One will enable countries to tax a portion of the profits of the world’s largest businesses that are attributable to consumption in their jurisdictions, including the profits of the world’s largest digital businesses.

Pillar Two will introduce a global minimum tax rate of 15% on large businesses to prevent them from shifting profits to low-tax jurisdictions.

The end is nigh

The UK has committed to ending its DST by the deadline of 31 December 2023 in order to adopt the OECD’s Pillar One model rules from 2024.

The UK government anticipates that it will introduce a domestic minimum tax in the UK to complement Pillar Two, likely to come into effect from 1 April 2024 at the earliest.

UK Withdraws Digital Services Tax – Conclusion

The withdrawal of the DST will have implications for digital companies operating in the UK. Businesses that have not yet been found liable for DST but consider that they may be in scope should revisit their DST exposure analysis.

The UK government’s commitment to introducing a domestic minimum tax may also have an impact on the tax liabilities of digital companies operating in the UK.

If you have any queries relating to UK Withdraws Digital Services Tax or tax matters in the UK more generally, then please do not hesitate to get in touch with a UK specalist Native!

Irish Finance Bill 2022: Pillar Two changes for R&D & KDB regimes

20 December 2022 11:16 am Leave a Comment

Introduction – Irish Finance Bill 2022

The Irish Finance Bill 2022 provides for changes to:

the Research and Development (R&D) tax credit; and
Knowledge Development Box tax regime

Both changes are to reflect the OECD’s Pillar Two model rules and the EU’s draft Pillar Two Directive.

Ireland’s R&D regime

Ireland has an attractive R&D tax credit for qualifying expenditure on R&D activities. This includes certain expenditure on plant and machinery and buildings.

The credit is currently 25% of the allowable expenditure.

The mechanics of the regime are that the tax credit can be offset against the claiming company’s current and prior year corporation tax liability. In addition, any excess credit may be:

carried forward against future corporation tax labilities of the company;
or claimed as a payable credit in three instalments over a period totalling 33 months

Pillar and post?

The OECD Pillar Two model rules and the EU draft Pillar Two Directive introduce the concept of a “qualified refundable tax credit” (QRTC).

Going forward, the R&D tax credit regime in Ireland will need to be consistent with QRTC requirements.

In order to qualify as a QRTC require, the tax credit to be paid as cash (or available as cash equivalents) within four years of the date on which the taxpayer is first entitled to it.

How does a QRTC interact with the Global Minimum Corporate Tax Rate?

A tax credit that qualifies as a QRTC will be treated as income and not as a reduction in taxes paid. This is important when it comes to calculating the relevant effective rate of tax rate for the purposes of the global minimum corporate tax rate.

Irish Finance Bill 2022 proposals

The Finance Bill proposals seek to revise the R&D tax credit so that it is consistent with the QRTC criteria. This will include providing that the credit is fully payable in cash or cash equivalents.

The new proposals under the Finance Bill measures provide that the first instalment of the R&D tax credit should be equal to the greater of:

€25,000 or, if lower, the total amount of the credit claimed; or
50% of the value of the credit claimed, with the balance of the credit being refunded in the subsequent two periods.

The cap on payable credits linked to the corporation tax/payroll tax payments will no longer apply.

A consequence of the change is that companies that could have obtained the full value of the credit in a current year versus their corporation tax liabilities, will now instead see that benefit spread over three years.

In addition, to ensure alignment with the Pillar Two rules, the R&D credit should be paid within the four-year period. This includes where there is an open investigation by the tax authority.

Knowledge Development Box (“KDB”)

The Finance Bill also provides for Pillar Two related changes to Ireland’s KDB.

The KDB is a form of patent box regime and provides for a 50% reduction of qualifying income. This results in an effective tax rate of 6.25% for the taxpayer in respect of the qualifying income.

However, the requirements are relatively strict and it is understood that uptake has been limited

The Finance Bill measures provide that the KDB trading expense deduction is reduced from 50% to 20% of qualifying income. This results in a new effective rate of 10% as opposed to the existing 6.25% on qualifying income.

If you have any queries about the Irish Finance Bill 2022, or Irish tax matters more generally, then please do not hesitate to get in touch.

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