International Tax Reform Developments

OECD/G20 Inclusive Framework on BEPS, a response to tax base erosion and profits

shifting:

• Minimum Corporate Income Tax of 15% in former low tax jurisdictions

• Moving rights to tax from countries of tax residence to countries of

markets/consumers

• Targeting multinational corporate groups of companies with high turnover and at

least 10% accounting profits before tax

The Organization for Economic Cooperation and

Development (OECD) and G20 have indicated that

global tax reform is the best way to combat rising tax base erosion and profit shifting from multinational enterprises (MNEs) seeking to avoid the high taxes in the jurisdiction that their main businesses are situated in.

In an effort to combat this practice and to modernize the International Tax System, the OECD along with G20 designed the Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS). The IF includes a Two-Pillar solution to address challenges arising from the digitalization of the economy. On July 11, 2023, the OECD reported that 138 members of the OECD/G20 IF on BEPS - representing over 90% of global GDP – agreed/approved an Outcome Statement to address these challenges. This agreement promises a significant and historic reform of the international tax system.

Jamaica, Barbados, St. Lucia, the Bahamas, and the Cayman Islands, to name a few, are all members of the OECD/G20 IF on BEPS that have agreed/approved the outcome statement.

The proposed tax reform is under two pillars. Pillar One (1) focuses on taxing rights

reallocation from the states of residence of MNEs to the market or user states where the MNE provides services. And Pillar Two (2) is focused on introducing global minimum tax.

The ultimate target is to ensure that large MNEs operating profitable businesses pay

their fair share of tax and do so to the right jurisdiction, thereby ensuring a level playing field for all and increasing tax certainty.

Pillar One

Part 1: Multilateral Convention

Pillar one proposes a Multilateral Convention (MLC), which will allow states who are

parties to the MLC to exercise a domestic taxing right with respect to a portion of the residual profits of MNEs that have a defined nexus to the markets of these Parties. In brief, this pillar deals with the reallocation of taxing rights from investment jurisdictions to market jurisdictions. For example, if Country A is the market jurisdiction and profits are shifted to an investment company resident in Country B, if both Country A and Country B are parties to the MLC, the Tax Authorities in Country A will have the right to tax the profits shifted to Country B.

The OECD is aiming to have the MLC enter into force by 2025, just 18 months away.

Part 2: Arm’s Length Principle

This Pillar aims at simplifying the existing transfer pricing rules and to streamline the application of the arm’s length principle to in-country baseline marketing and distribution activities especially as it relates to low-capacity countries with the lack of appropriate local market comparables through which arm’s length prices can be established. In other words, transfer pricing guidelines for transactions in jurisdictions which do not have sufficient similar transactions to set up a reliable database.

Further work will be undertaken on certain aspects of this pillar as it relates to the

appropriate balance between a quantitative and qualitative approach in identifying

baseline distribution activities among other things.

Once the work is completed, it should be incorporated into the OECD Transfer Pricing Guidelines by the beginning of 2024.

Pillar Two

Pillar Two consists of a set of rules which give jurisdictions a taxing right at specified

minimum rates where existing tax laws would not have. These rules are:

1. Income Inclusion Rule (IIR)

2. Undertaxed Payment Rule (UPR)

3. And the Subject to Tax Rule (STTR)

The IIR allows for a top up of tax rate on parent companies in a group to a minimum

15% to the extent that subsidiaries benefit from low taxed income.

The UPR denies or restricts tax deductions to a parent company to the extent that

subsidiaries within the group benefit from low taxed income.

Under the STTR, where a treaty currently causes the country of residence of the payer of certain expenses to give up taxing rights to another country (i.e. the country of residence of the payee), the STTR would allow the country of the payer to regain some taxing rights to the extent that the country of the payee taxes the income at less than 9%. A Multilateral instrument implementing the STTR should be open for signature from October 2023.

Inclusive Framework members can elect to implement the STTR by signing the Multilateral Instrument, or bilaterally amending their treaties to include the STTR.

The payments/expenses on which STTR would apply include:

• Interest

• Royalties

• Insurance and reinsurance

• Right of use

• Rent of business equipment

• Financial guarantees and commitment fees for loans

Materiality Considerations

By reference to the smallest economy in a multinational transaction, the following will be the materiality levels for their inclusion: For countries with GDP of greater than 40B Euro, the threshold is Euro 1M; and for countries with GDP of less than Euro 40B, the threshold is Euro 0.25M.

Excluded Persons include:

• Individuals

• Unconnected entities

• Pension funds

• Non-for-profit organizations

• Governments

• International organizations

Companies in scope are MNE, from a group perspective with global turnover of at least Euro 20B and profit above Euro 10% before tax. The turnover threshold is slated to be reduced to Euro 10B seven years after implementation. Companies within extractives and regulated financial services industries are also excluded.

How will the Two-Pillar approach affect the Caribbean?

Caribbean countries such as the Cayman Islands, the Bahamas, and the British Virgin Islands, that currently charge no corporate income tax, but who have now signed on to the IF, will lose some of their attractiveness to foreign corporations when the Two-Pillar approach is implemented.

MNEs based in low or no tax jurisdictions will now be expected to pay a minimum global tax in these jurisdictions. There will also be the reallocation of taxing rights to market jurisdictions from investment hubs jurisdictions that are a party to the MLC.

With international pressure, it is expected that the Caribbean region will implement this framework which will have significant tax impact on MNEs.

Whenever a legislation changes, it comes with threats as well as opportunities. The

threats being to companies who rely on outdated tax planning. However, keen study of legislation may also present opportunities for tax savings and efficiencies which are still within reach.

Recommendations

1. It is recommended that MNEs seek professional tax planning support to review

their existing tax structures for the potential threats and opportunities available in

light of the impending tax reform.

2. In addition, MNE’s are encouraged to ensure that they are kept abreast of

changes to tax legislation by subscribing to periodic updates from tax experts.

For further information or tax support for decision making contact:

Call (876)618-9855 or email info@signaturecreed.com

The information contained in this article does not constitute legal or other professional advice or an opinion of any kind and is intended for general information purposes only.