The World Bank has published a report setting out a framework to help countries evaluate their options for implementing the Pillar Two global minimum tax (GMT). The report is the final version of a working paper published in September 2022. The final report is largely in line with the working paper, including the recommendation that countries take concrete steps now to prepare for the introduction of the GMT. The framework set out in the report includes the following levels and options:
STATUS QUO
OPTION 1: 'DO NOTHING'
The nature of the GMT rules and the common approach means a country does not need to implement the model rules. The "do nothing" option is on paper feasible under the agreement, but it is not without risks, particularly for a country foregoing tax revenues because another country is topping-up taxes.
LEVEL 1 MEASURES - PROTECTING THE TAX BASE
A specific feature of the GMT rules is that undertaxed profits can be topped up in other countries. It is recommended that countries take actions to ensure they do not lose tax revenues to other countries, thus the need to protect its tax base.
OPTION 2: INTRODUCE A QUALIFIED DOMESTIC MINIMUM TOP-UP TAX
Countries can introduce their own Qualified Domestic Minimum Top-up Tax (QDMTT) based on the GMT mechanics, which is then fully creditable against any liability under the GMT, preserving the jurisdiction's primary right of taxation over its own income.
OPTION 3: EVALUATE AND REFORM TAX INCENTIVES TO BE IN LINE WITH THE GMT
The GMT rules are likely to have implications for the viability of certain tax incentives. Therefore, it is prudent for countries to carry out an evaluation of their incentive regime. This is particularly relevant in cases where the tax provision (or a combination of reliefs) could lead to a scenario of an ETR of less than 15%.
LEVEL 2 MEASURES - IMPLEMENT THE CORE GMT RULES
Level 2 measures are the implementation of the core GMT rules, the Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR). The policy impetus for introducing these rules will depend on country-specific circumstances, particularly the profile of MNEs in the country, the applicable ETR, and implementation of Level 1 measures.
OPTION 4: INTRODUCE THE INCOME INCLUSION RULE
IIR is the core GMT rule. It is imposed on a parent entity after considering the insufficiently taxed income of a constituent entity.
Whether a country implements the IIR will primarily depend on whether it has UPEs of MNEs within its jurisdiction. Having UPEs within the country creates a strong case for implementing the IIR. If a country does not have UPEs, there should not be an immediate requirement to implement the IIR.
OPTION 5: INTRODUCE THE UNDERTAXED PAYMENTS RULE
The UTPR will be particularly relevant for countries who have in-scope entities of MNEs and where the country/countries of the UPE of MNEs do not implement the IIR. The agreement envisions that the UTPR will come into effect one year after the IIR, allowing countries to defer decisions on implementing the UTPR.
LEVEL 3 MEASURES - CONSIDERATION OF BROADER CORPORATE INCOME TAX REFORMS
The GMT is a significant development in international taxation. The core GMT rules, the IIR and the UTPR, are complex and it may not be necessary for all countries to implement them. However, this new international tax framework may provide opportunities for countries to reshape their CIT regimes, whether by broadening the tax base or initiating tax rate reforms, including revisiting their current tax incentives regime designed to attract investment.
OPTION 6: CONSIDER BROADER CIT REFORM, INCLUDING RATE POLICY
An option for countries is to review their overall CIT regime to ensure that it is optimized for the new Pillar Two environment. Options include rate policy, simplification of the tax code, and base broadening. These options have the potential for an overall increase in tax revenues and investment attractiveness, although the choices and outcomes will depend on the circumstances within individual countries.
OPTION 7: OPTIMIZE TAX INCENTIVE OFFERING WITHIN THE GMT RULES
Option 3 advocates that countries should review and reform tax incentives regimes to be compatible with Pillar Two GMT rules. These are important steps in protecting the tax base as well as avoiding low taxation of MNEs and top-up of taxes by other countries under the IIR or UTPR. Countries may also consider new incentives that are compatible with GMT rules.