Understanding the New Tax Regulations for Multinational Enterprises
In a move to address the challenges of taxation in the digital economy, multinational enterprises (MNEs) with revenues exceeding €750 million are now subject to a minimum tax rate of 15 percent on excess profits. This regulation, known as Pillar Two, targets companies that have surpassed this revenue threshold in either of the preceding two years within a four-year period.
When the effective tax rate in a jurisdiction is below 15 percent, Pillar Two introduces a set of rules designed to ensure that MNEs contribute their fair share. These include the income inclusion rule (IIR) and under-tax payment rule (UTPR), which together form the global anti-base erosion rules (GloBE). Additionally, the treaty-based subject to tax rule (STTR) comes into play. These regulations must be applied in a specific sequence, starting with the adjustment of the qualified domestic minimum top-up tax (QDMTT), followed by STTR, IIR, and lastly, UTPR.
The QDMTT serves as the initial top-up tax within an entity’s jurisdiction, aligning with the OECD’s framework. The STTR then applies to transactions between related parties when the tax rate is below nine percent. Notably, entities in the UAE are exempt from STTR since the corporate tax rate is at nine percent.
The IIR is a top-down regulation requiring the ultimate parent company or intermediate parent entity to ensure a 15 percent tax rate on profits. Should IIR be insufficient to meet this threshold, UTPR acts as a backstop rule, potentially disallowing deductions or imposing additional taxes to achieve the minimum rate.
An illustrative scenario involves a parent company X with subsidiaries Y and Z in different tax jurisdictions. If Y’s jurisdiction has a lower tax rate, X is responsible for topping up the tax to meet the 15 percent minimum. The calculations become more complex when investments are held through sub-parents, as seen with SPI and SPII, which would each contribute to the top-up tax relative to their stake in Y.
If no group entities have implemented IIR, UTPR ensures compliance by adjusting deductible expenses or withholding taxes to secure the required minimum tax payment. The interlocking nature of IIR and UTPR means that UTPR’s application is contingent on the outcome of IIR.
Mahar Afzal, managing partner at Kress Cooper Management Consultants, emphasizes that these regulations are crucial for establishing a fair and consistent global tax system for MNEs. While this article reflects his expertise, it does not represent an official stance of Khaleej Times but rather his professional perspective.
